Multinationals and the Gains from International Diversification

61 Pages Posted: 27 Oct 1998 Last revised: 13 Jan 2002

See all articles by Patrick F. Rowland

Patrick F. Rowland

Fordham University - Department of Economics

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 1998

Abstract

One possible explanation for home bias is that investors may obtain indirect international diversification benefits by investing in multinational firms rather than by investing directly in foreign markets. This paper employs mean-variance spanning tests to examine the diversification potential of multinational firms and foreign market indices for investors domiciled in Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. We find that in most countries and most time periods, the portfolio of domestic stocks spans the risk and return opportunities of a portfolio that includes domestic and multinational stocks. However, there is weak evidence that U.S. multinationals provided global diversification benefits in the full 1984-92 sample and in the post-1987 subsample. We also find that the addition of foreign market indices to a domestic portfolio - inclusive of multinationals - provides diversification benefits. The economic importance of the shift of the portfolio frontier - measured as the utility gain from diversification - varies considerably from market to market and often reflects the benefits of large short positions in certain markets.

Suggested Citation

Rowland, Patrick F. and Tesar, Linda L., Multinationals and the Gains from International Diversification (September 1998). NBER Working Paper No. w6733. Available at SSRN: https://ssrn.com/abstract=129588

Patrick F. Rowland

Fordham University - Department of Economics ( email )

Bronx, NY 10458
United States

Linda L. Tesar (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-763-2254 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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