Cross-Border Diversification in Bank Asset Portfolios
International Finance, Forthcoming
36 Pages Posted: 5 Oct 2009 Last revised: 25 May 2010
Date Written: October 5, 2009
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.
Keywords: International banking, portfolio diversification, international financial integration
JEL Classification: G21, G11, E44, F40
Suggested Citation: Suggested Citation