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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

David Le Bris

Toulouse Business School

Date Written: September 1, 2012

Abstract

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

Le Bris, David, Why did French Savers buy Foreign Assets before 1914? A Decomposition of the Benefits from Diversification (September 1, 2012). Louvain Economic Review, 79.3, 2013, pp. 71-89.. Available at SSRN: https://ssrn.com/abstract=1366172 or http://dx.doi.org/10.2139/ssrn.1366172

David Le Bris (Contact Author)

Toulouse Business School ( email )

20, bd Lascrosses
Toulouse, 31068
France

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