IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Are the Gains from Foreign Diversification Diminishing? Assessing the Impact with Cross-Listed Stocks

  • Chua, Choong Tze

    (Singapore Management University)

  • Lai, Sandy

    (Singapore Management Universitye)

  • Lewis, Karen K.

    (University of Pennsylvania)

Registered author(s):

    Foreign diversification has a long history in financial economics. In this paper, we re-examine this issue with foreign companies that are listed on US exchanges, combining features of three different literatures. One literature suggests that domestic portfolios including cross-listed stocks can duplicate the behavior of foreign market returns without the need for US investors to go abroad. A second literature finds that the returns from these foreign stocks often become more sensitive to the US market after cross-listing. Third, the emerging market on literature finds evidence that the relationships across stock markets shift after stock market liberalizations. In this paper, we combine aspects of these three literatures to assess the impact on foreign diversification with cross-listed firms for a US investor. For this purpose, we use the Bai and Perron (1998) break date estimator to test for and estimate breaks in the sensitivity of individual foreign stocks listed on the NYSE and NASDAQ. We find that returns on foreign stocks have become more sensitive to the US market both directly through their company US betas and indirectly through their home market betas against the US market. As a result, the minimum variance allocation into a portfolio of these companies declines over time. During the financial crises of the late 2000s, investment in foreign company stocks reduce risk only if these stocks can be shorted.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://d1c25a6gwz7q5e.cloudfront.net/papers/download/05052013_Lewispaper.pdf
    Download Restriction: no

    Paper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 10-1.

    as
    in new window

    Length:
    Date of creation: Feb 2010
    Date of revision:
    Handle: RePEc:ecl:upafin:10-1
    Contact details of provider: Postal: 3404 Steinberg Hall-Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104-6367
    Phone: (215)898-7626
    Fax: (215)573-2242
    Web page: http://finance.wharton.upenn.edu/weiss/papers.html
    Email:


    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ecl:upafin:10-1. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.