Do Foreign Stocks Substitute for International Diversification?

44 Pages Posted: 24 May 2017 Last revised: 22 Jun 2019

See all articles by Vicente J. Bermejo

Vicente J. Bermejo

ESADE Business School

José Manuel Campa

University of Navarra - Madrid Campus - IESE Business School; National Bureau of Economic Research (NBER)

Rodolfo G. Campos

Banco de España

Mohammed Zakriya

Universitat Ramon Llull, ESADE Business School

Date Written: June 1, 2019

Abstract

Using a novel sample of foreign securities available for trade in 42 countries during the last four decades (1979-2018), we characterize the rise in importance of foreign stocks for investors in their host countries and its implications for diversification benefits across industries and countries. We document a substantial increase in the number and the market value of stocks available for trade in markets outside of their home country (i.e., foreign stocks). The availability of foreign stocks in host countries allows domestic investors to increase their international diversification from home by investing in these stocks. We find that this rise in the number of foreign securities has led to the increase in the importance of industry effects relative to country effects on stock returns. Thus, we conclude that including foreign stocks in portfolio investments offers an effective substitute for international diversification, and significantly contributes towards increasing the integration of global markets.

Keywords: International diversication, Country/industry effects, Foreign stocks, Financial integration

JEL Classification: G11, G15, F36, G31

Suggested Citation

Bermejo, Vicente J. and Campa, José Manuel and Campos, Rodolfo G. and Zakriya, Mohammed, Do Foreign Stocks Substitute for International Diversification? (June 1, 2019). ESADE Business School Research Paper, No 267. Available at SSRN: https://ssrn.com/abstract=2973060 or http://dx.doi.org/10.2139/ssrn.2973060

Vicente J. Bermejo (Contact Author)

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

José Manuel Campa

University of Navarra - Madrid Campus - IESE Business School ( email )

Camino del Cerro del Aguila 3
Madrid, 28023
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rodolfo G. Campos

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Mohammed Zakriya

Universitat Ramon Llull, ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

HOME PAGE: http://www.esade.edu/research-webs/eng/gref

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