Why did French Savers buy Foreign Assets before 1914? A Decomposition of the Benefits from Diversification
Louvain Economic Review, 79.3, 2013, pp. 71-89.
25 Pages Posted: 22 Mar 2009 Last revised: 24 May 2014
Date Written: September 1, 2012
This paper examines the question as to whether, before 1914, French savers bought foreign assets to gain higher foreign returns or because of low correlation. Using tools of the Modern Portfolio Theory, the benefit from international diversification is decomposed into these two components, using a counterfactual hypothesis of perfect correlation between two assets. This approach allows an original measure of the respective share of the higher foreign returns and the low correlation in the benefit of diversification. The argument is put forward that French investors were mainly attracted by weak foreign correlation, rather than higher returns, since a higher risk-return portfolio was achievable in the domestic market.
Keywords: Paris Stock exchange, correlation, portfolio management, Russia, 19th century, 20th century
JEL Classification: G11, G12, G15, N21, N23
Suggested Citation: Suggested Citation