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Cross-Border Diversification in Bank Asset PortfoliosClaudia M. BuchUniversity of Tuebingen - Faculty of Economics and Business Administration John C. DriscollFederal Reserve Board - Division of Monetary Affairs Charlotte OstergaardNorwegian School of Management (BI) - Department of Financial Economics October 5, 2009 International Finance, Forthcoming Abstract: We compute optimally diversified international asset portfolios for banks located in France, Germany, Italy, the U.K., and the U.S., using the mean-variance portfolio model with currency hedging. We compare these benchmark portfolios to the actual cross-border asset positions of banks from 1995-2003 and ask whether the differences are best explained by regulations, institutions, cultural conditions, or other financial frictions. Our results suggest that both culture and regulations affect the probability of a country being overweighted in banks’ portfolios: countries whose residents score higher on a survey measure of trust are more likely to be overweighted, while countries that have tighter capital controls are less likely. From a policy standpoint, the importance of culture suggests a limit to the degree of financial integration that may be achieved by the removal of formal economic barriers.
Number of Pages in PDF File: 36 Keywords: International banking, portfolio diversification, international financial integration JEL Classification: G21, G11, E44, F40 Accepted Paper SeriesDate posted: October 5, 2009 ; Last revised: May 25, 2010Suggested CitationContact Information
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