IDEAS home Printed from
   My bibliography  Save this paper

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


  • Karen K. Lewis
  • Sandy Lai


How important is foreign diversification? In this paper, we re-examine this question motivated by findings from the literature about foreign companies that are listed on US exchanges. Specifically, domestic portfolios including cross-listed stocks can provide the same diversification as foreign market returns without the need for US investors to go abroad. At the same time, the betas of these foreign stock returns against the US market increase after cross-listing, suggesting diversification worsens over time. In this paper, we assess the impact of these changes on foreign diversification for a US investor. We test for and estimate breaks in the sensitivity of individual foreign stocks listed on US exchanges. We find that roughly half of the changes in betas arise from greater integration between the U.S. and the companies' home markets, not in the companies betas themselves. Moreover, the gains from diversifying into these stocks has declined over time.

Suggested Citation

  • Karen K. Lewis & Sandy Lai, 2012. "Are the Gains from Foreign Diversification Diminishing? Assessing the Impact with Cross-listed Stocks," NBER Working Papers 18627, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18627
    Note: AP IFM

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    2. Shmuel Baruch & Gideon Saar, 2009. "Asset Returns and the Listing Choice of Firms," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2239-2274, June.
    3. Söhnke M. Bartram & John M. Griffin & Tae-Hoon Lim & David T. Ng, 2015. "How Important Are Foreign Ownership Linkages for International Stock Returns?," Review of Financial Studies, Society for Financial Studies, vol. 28(11), pages 3036-3072.
    4. Bekaert, Geert & Harvey, Campbell R. & Lumsdaine, Robin L., 2002. "Dating the integration of world equity markets," Journal of Financial Economics, Elsevier, vol. 65(2), pages 203-247, August.
    5. Doidge, Craig & Karolyi, G. Andrew & Stulz, Rene M., 2004. "Why are foreign firms listed in the U.S. worth more?," Journal of Financial Economics, Elsevier, vol. 71(2), pages 205-238, February.
    6. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    7. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-444, June.
    8. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    9. Dumas, Bernard & Solnik, Bruno, 1995. " The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-479, June.
    10. Liu, Edith X., 2010. "Diversifying Credit Risk with International Corporate Bonds," Working Papers 10-4, University of Pennsylvania, Wharton School, Weiss Center.
    11. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, April.
    12. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:18627. 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: (). General contact details of provider: .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.