International Diversification at Home and Abroad

40 Pages Posted: 29 Feb 2004

See all articles by Francis E. Warnock

Francis E. Warnock

University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)

Fang Cai

Federal Reserve Board

Multiple version iconThere are 3 versions of this paper

Date Written: December 2004

Abstract

We analyze foreigners' and domestic institutional investors' positions in U.S. equities. Controlling for many factors, we uncover a common preference for large firms and firms that are diversified internationally. The domestic preference for internationally diversified firms implies that investors might obtain substantial international diversification by investing at home. Using an international factor model, we show that exposure to foreign equity markets is indeed greater for domestic firms that are more diversified internationally, suggesting that at least some of the home-grown foreign exposure translates into international diversification benefits. After accounting for home-grown foreign exposure, the share of 'foreign' equities in investors' portfolios nearly doubles, reducing (but not eliminating) the observed home bias.

Keywords: home bias, international portfolio allocation, foreign exposure

JEL Classification: G11, G15, G3

Suggested Citation

Warnock, Francis E. and Cai, Fang, International Diversification at Home and Abroad (December 2004). International Finance Discussion Paper No. 793; Darden Business School Working Paper No. DSWP-05-08-SSRN. Available at SSRN: https://ssrn.com/abstract=509743 or http://dx.doi.org/10.2139/ssrn.509743

Francis E. Warnock (Contact Author)

University of Virginia - Darden Business School ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-6076 (Phone)

HOME PAGE: http://faculty.darden.virginia.edu/warnockf/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138-5398

Fang Cai

Federal Reserve Board ( email )

Office of Financial Stability Policy and Research
1801 K St NW
Washington, DC 20551
United States
202-452-3540 (Phone)
202-263-4850 (Fax)

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