Are the Gains from Foreign Diversification Diminishing? Assessing the Impact with Cross-Listed Stocks

77 Pages Posted: 22 Dec 2012

See all articles by Karen K. Lewis

Karen K. Lewis

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Sandy Lai

University of Hong Kong

Date Written: December 2012

Abstract

How important is foreign diversification? In this paper, we re-examine this question motivated by findings from the literature about foreign companies that are listed on US exchanges. Specifically, domestic portfolios including cross-listed stocks can provide the same diversification as foreign market returns without the need for US investors to go abroad. At the same time, the betas of these foreign stock returns against the US market increase after cross-listing, suggesting diversification worsens over time. In this paper, we assess the impact of these changes on foreign diversification for a US investor. We test for and estimate breaks in the sensitivity of individual foreign stocks listed on US exchanges. We find that roughly half of the changes in betas arise from greater integration between the U.S. and the companies' home markets, not in the companies betas themselves. Moreover, the gains from diversifying into these stocks has declined over time.

Suggested Citation

Lewis, Karen Kay and Lai, Sandy, Are the Gains from Foreign Diversification Diminishing? Assessing the Impact with Cross-Listed Stocks (December 2012). NBER Working Paper No. w18627, Available at SSRN: https://ssrn.com/abstract=2192801

Karen Kay Lewis (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER)

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Sandy Lai

University of Hong Kong ( email )

Faculty of Business and Economics
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Hong Kong, Pokfulam HK
Hong Kong

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