The benefits of international diversification have been recognized for decades. In spite of this, most investors hold nearly all of their wealth in domestic assets. In this paper, we construct new estimates of the international equity portfolio holdings of investors in the U.S., Japan, and Britain. More than 98% of the equity portfolio of Japanese investors is held domestically; the analogous percentages are 94% for the U.S., and 82% for Britain. We use a simple model of investor preferences and behavior to show that current portfolio patterns imply that investors in each nation expect returns in their domestic equity market to be several hundred basis points higher than returns in other markets. This lack of diversification appears to be the result of investor choices, rather than institutional constraints.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
3609.
Length: Date of creation: Jan 1991 Date of revision: Publication status: published as French, Kenneth R. and James M. Poterba. "Investor Diversification And International Equity Markets," American Economic Review, 1991, v81(2), 222-226. American Economic Review, Vol. 81, (May 1991), pp.222-226. Handle: RePEc:nbr:nberwo:3609
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