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International portfolio diversification is better than you think

Author

Listed:
  • Nicolas Coeurdacier

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research)

  • Stéphane Guibaud

    (LSE - London School of Economics and Political Science)

Abstract

Using aggregate data on bilateral cross-border equity holdings, we investigate whether investors correctly hedge their over-exposure to domestic risk (the well-known equity home bias) by investing in foreign stock markets that have low correlation with their home stock market. To deal with the endogeneity of stock return correlations, we instrument current correlations with past correlations. Controlling for many determinants of international portfolios, we find that, all else equal, investors do tilt their foreign holdings towards countries, which offer better diversification opportunities. The diversification motive that we uncover is stronger for source countries exhibiting a higher level of home bias.

Suggested Citation

  • Nicolas Coeurdacier & Stéphane Guibaud, 2011. "International portfolio diversification is better than you think," Post-Print hal-03602483, HAL.
    • Handle: RePEc:hal:journl:hal-03602483
    DOI: 10.1016/j.jimonfin.2010.10.003
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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