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Multinationals and the Gains from International Diversification

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  • Patrick F. Rowland
  • Linda L. Tesar

Abstract

One possible explanation for home bias is that investors may obtain indirect international diversification benefits by investing in multinational firms rather than by investing directly in foreign markets. This paper employs mean-variance spanning tests to examine the diversification potential of multinational firms and foreign market indices for investors domiciled in Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. We find that in most countries and most time periods, the portfolio of domestic stocks spans the risk and return opportunities of a portfolio that includes domestic and multinational stocks. However, there is weak evidence that U.S. multinationals provided global diversification benefits in the full 1984-92 sample and in the post-1987 subsample. We also find that the addition of foreign market indices to a domestic portfolio - inclusive of multinationals - provides diversification benefits. The economic importance of the shift of the portfolio frontier - measured as the utility gain from diversification - varies considerably from market to market and often reflects the benefits of large short positions in certain markets.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6733.

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Date of creation: Sep 1998
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Publication status: published as Rowland, Patrick F. and Linda L. Tesar. "Multinationals And The Gains From International Diversification," Review of Economic Dynamics, 2004, v7(4,Oct), 789-826.
Handle: RePEc:nbr:nberwo:6733

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  1. Gordon M. Bodnar & Gregory S. Hayt & Richard C. Marston, 1998. "1998 Wharton Survey of Financial Risk Management by US Non-Financial Firms," Financial Management, Financial Management Association, Financial Management Association, vol. 27(4), Winter.
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  7. MacKinlay, A Craig & Richardson, Matthew P, 1991. " Using Generalized Method of Moments to Test Mean-Variance Efficiency," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 511-27, June.
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  10. Lewis, Karen K., 2000. "Why do stocks and consumption imply such different gains from international risk sharing?," Journal of International Economics, Elsevier, Elsevier, vol. 52(1), pages 1-35, October.
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  13. Linda L. Tesar & Ingrid M. Werner, 1994. "International Equity Transactions and U.S. Portfolio Choice," NBER Chapters, National Bureau of Economic Research, Inc, in: The Internationalization of Equity Markets, pages 185-227 National Bureau of Economic Research, Inc.
  14. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(1-2), pages 3-56, February.
  15. Jobson, J. D. & Korkie, Bob, 1989. "A Performance Interpretation of Multivariate Tests of Asset Set Intersection, Spanning, and Mean-Variance Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 24(02), pages 185-204, June.
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  17. Karen K. Lewis, 1996. "Consumption, stock returns, and the gains from international risk-sharing," Working Papers 96-6, Federal Reserve Bank of Philadelphia.
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