The International Diversification Puzzle Is Worse Than You Think
Despite the growing integration of international financial markets, investors do not diversify internationally to any significant extent. The authors show that this 'international diversification puzzle' is deepened once they consider the implications of nontraded human capital for portfolio composition. While growth rates of labor and capital income are not highly correlated within countries, the authors find that the returns to human capital and physical capital are very highly correlated within four OECD countries. Hedging human capital risk therefore involves a substantial short position in domestic marketable assets. A diversified world portfolio will involve a negative position in domestic marketable assets. Copyright 1997 by American Economic Association.
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Volume (Year): 87 (1997)
Issue (Month): 1 (March)
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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.:
- Mankiw, N. Gregory & Zeldes, Stephen P., 1991.
"The consumption of stockholders and nonstockholders,"
Journal of Financial Economics,
Elsevier, vol. 29(1), pages 97-112, March.
- Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
- N. Gregory Mankiw & Stephen P. Zeldes, 1990. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc.
- French, Kenneth R. & Poterba, James M., 1990. "Japanese and U.S. cross-border common stock investments," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 476-493, December.
- Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
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