Unexploited Gains from International Diversification

70 Pages Posted: 20 Mar 2009

See all articles by Tatiana Didier

Tatiana Didier

World Bank

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Date Written: December 23, 2008

Abstract

Using unique micro data on U.S. institutional investor portfolios, this paper studies how capital, meant to be invested globally, is actually diversified internationally. We show that although the mutual fund industry has moved toward funds that have more flexibility to invest across countries and regions (global funds), mutual funds invest in a finite, rather small number of firms, almost independently of the set of available instruments. The number of mutual fund holdings in stocks and countries from a given region declines as funds become more global. This restricted investment practice has a cost: there are unexploited gains from international diversification. Mutual funds could achieve better returns by broadening their investment scope to include stocks held by specialized funds within the same mutual fund family. This investment pattern is neither explained by the lack of available instruments or information, nor by a better ability of global funds to minimize losses.

Keywords: financial integration, globalization, mutual funds, risk diversification

JEL Classification: F30, F36, G11, G15, G23

Suggested Citation

Didier, Tatiana and Rigobon, Roberto and Schmukler, Sergio, Unexploited Gains from International Diversification (December 23, 2008). Available at SSRN: https://ssrn.com/abstract=1363885 or http://dx.doi.org/10.2139/ssrn.1363885

Tatiana Didier

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States
(202)458-1525 (Phone)

Roberto Rigobon (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-447
Cambridge, MA 02142
United States
617-258-8374 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sergio Schmukler

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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