International Portfolio Diversification Benefits: Cross-Country Evidence from a Local Perspective

39 Pages Posted: 23 Jun 2011

See all articles by Joost Driessen

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management; Tilburg University - Center for Economic Research (CentER)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Date Written: December 15, 2005

Abstract

We investigate how the benefits of international portfolio diversification differ across countries from the perspective of a local investor. We find that the benefits of investing abroad are largest for investors in developing countries, including when controlling for currency effects. Most of the benefits are obtained from investing outside the region of the home country. These global diversification benefits remain large when controlling for short-sales constraints in developing stock markets. The gains from international portfolio diversification appear to be largest for countries with high country risk. In addition to this cross-sectional evidence, we also provide evidence that diversification benefits vary over time as country risk changes. We find that diversification benefits have decreased for most countries in our sample over the past two decades.

Keywords: portfolio investment, diversification benefits, emerging markets, home bias, investment restrictions

JEL Classification: F36, G11, G15

Suggested Citation

Driessen, Joost and Laeven, Luc A., International Portfolio Diversification Benefits: Cross-Country Evidence from a Local Perspective (December 15, 2005). Available at SSRN: https://ssrn.com/abstract=1870872 or http://dx.doi.org/10.2139/ssrn.1870872

Joost Driessen (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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