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That's Where the Money Was: Foreign Bias and English Investment Abroad, 1866-1907

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  • Benjamin Chabot

    ()
    (Yale University and NBER)

  • Christopher J. Kurz

    (Board of Governors of the Federal Reserve System)

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    Abstract

    Why did Victorian Britain invest so much capital abroad? We collect over 500,000 monthly returns of British and foreign securities trading in London and the United States between 1866 and 1907. These heretofore-unknown data allow us to better quantify the historical benefits of international diversification and revisit the question of whether British Victorian investor bias starved new domestic industries of capital. We find no evidence of bias. A British investor who increased his investment in new British industry at the expense of foreign diversification would have been worse off. The addition of foreign assets significantly expanded the mean-variance frontier and resulted in utility gains equivalent to a meaningful increase in lifetime consumption.

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    Bibliographic Info

    Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 972.

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    Length: 34 pages
    Date of creation: Jun 2009
    Date of revision:
    Handle: RePEc:egc:wpaper:972

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    Keywords: Capital markets; Home bias; History; Victorian overseas investment;

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    1. Roon, F.A. de & Nijman, T.E., 1998. "Testing for mean-variance spanning: A survey," Discussion Paper 1998-132, Tilburg University, Center for Economic Research.
    2. DONALD N. McCLOSKEY, 1970. "Did Victorian Britain Fail?," Economic History Review, Economic History Society, vol. 23(3), pages 446-459, December.
    3. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers 691, Board of Governors of the Federal Reserve System (U.S.).
    4. Peter Temin, 1989. "Capital exports, 1870-1914: a reply," Economic History Review, Economic History Society, vol. 42(2), pages 265-266, 05.
    5. Patrick F. Rowland & Linda L. Tesar, 1998. "Multinationals and the Gains from International Diversification," NBER Working Papers 6733, National Bureau of Economic Research, Inc.
    6. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
    7. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-52, September.
    8. Crafts, N F R & Leybourne, S J & Mills, Terence C, 1989. "The Climacteric in Late Victorian Britain and France: A Reappraisal of the Evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(2), pages 103-17, April-Jun.
    9. N. F. R. Crafts, 1979. "Victorian Britain Did Fail," Economic History Review, Economic History Society, vol. 32(4), pages 533-537, November.
    10. Huberman, Gur & Kandel, Shmuel, 1987. " Mean-Variance Spanning," Journal of Finance, American Finance Association, vol. 42(4), pages 873-88, September.
    11. William N. Goetzmann & Andrey Ukhov, 2005. "British Investment Overseas 1870-1913: A Modern Portfolio Theory Approach," NBER Working Papers 11266, National Bureau of Economic Research, Inc.
    12. J. Bradford De Long & Richard Grossman, 1992. "Excess Volatility on the London Stock Market, 1870-1990," J. Bradford De Long's Working Papers _133, University of California at Berkeley, Economics Department.
    13. Harold L. Cole & Maurice Obstfeld, 1989. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
    14. Peter Temin, 1987. "Capital exports, 1870-1914: an alternative model," Economic History Review, Economic History Society, vol. 40(3), pages 453-458, 08.
    15. DONALD N. McGLOSKEY, 1979. "No It Did Not: A Reply to Crafts," Economic History Review, Economic History Society, vol. 32(4), pages 538-541, November.
    16. repec:cup:cbooks:9780521584401 is not listed on IDEAS
    17. Kennedy, W. P., 1974. "Foreign investment, trade and growth in the United Kingdom, 1870-1913," Explorations in Economic History, Elsevier, vol. 11(4), pages 415-444.
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