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International diversification at home and abroad

  • Fang Cai
  • Francis E. Warnock

We analyze foreigners' and domestic institutional investors' holdings of U.S. equities and find common preferences for large firms and firms that are diversified internationally. The domestic preference for internationally diversified firms implies that investors might obtain substantial international diversification by investing at home. Using an international factor model, we show that exposure to foreign equity markets is indeed greater for domestic firms that are more diversified internationally, suggesting that at least some of the home-grown foreign exposure translates into international diversification benefits. After accounting for home-grown foreign exposure, the share of `foreign' equities in U.S. portfolios doubles to 24 percent, greatly reducing the observed home bias.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 793.

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Date of creation: 2004
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Handle: RePEc:fip:fedgif:793
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