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International Diversification at Home and Abroad

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Author Info
Fang Cai
Francis E. Warnock
Abstract

It is an established fact that investors favor the familiar%u2014be it domestic securities or, within a country, the securities of nearby firms%u2014and avoid investments that would provide the greatest diversification benefits. While we do not rule out familiarity as an important driver of portfolio allocations, we provide new evidence of investors%u2019 international diversification motive. In particular, our analysis of the security-level U.S. equity holdings of foreign and domestic institutional investors indicates that institutional investors reveal a preference for domestic multinationals (MNCs), even after controlling for familiarity factors. We attribute this revealed preference to the desire to obtain %u201Csafe%u201D international diversification. We then show that holdings of domestic MNCs are substantial and, after accounting for this home-grown foreign exposure, that the share of %u201Cforeign%u201D equities in investors%u2019 portfolios roughly doubles, reducing (but not eliminating) the observed home bias.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12220.

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Date of creation: May 2006
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Handle: RePEc:nbr:nberwo:12220

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G3 - Financial Economics - - Corporate Finance and Governance

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mihir A. Desai & Dhammika Dharmapala, 2007. "Taxes, Institutions and Foreign Diversification Opportunities," NBER Working Papers 13132, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Marcela Meirelles Aurelio, 2006. "Going global : the changing pattern of U.S. investment abroad," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32. [Downloadable!]
  3. Dimitrios Christelis & Dimitris Georgarakos, 2008. "Investing at Home and Abroad: Different Costs, Different People?," CSEF Working Papers 188, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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