Cross-Border Diversification in Bank Asset Portfolios
Claudia M. Buch
University of Tuebingen - Faculty of Economics and Business Administration
John C. Driscoll
Federal Reserve Board - Division of Monetary Affairs
Norwegian School of Management (BI) - Department of Financial Economics
October 5, 2009
International Finance, Forthcoming
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, F40Accepted Paper Series
Date posted: October 5, 2009 ; Last revised: May 25, 2010
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