Multinationals and the Gains from International Diversification
AbstractOne 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6733.
Date of creation: Sep 1998
Date of revision:
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.
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Other versions of this item:
- Patrick F. Rowland & Linda L. Tesar, 2004. "Multinationals and the Gains from International Diversification," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 789-826, October.
- Rowland, P.F. & Tesar, L.L., 1998. "Multinationals and the Gains from International Diversification," Working Papers 425, Research Seminar in International Economics, University of Michigan.
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-1998-10-08 (All new papers)
- NEP-CFN-1998-10-08 (Corporate Finance)
- NEP-IFN-1998-10-08 (International Finance)
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