International Diversification at Home and Abroad

38 Pages Posted: 25 May 2006 Last revised: 11 May 2007

See all articles by Fang Cai

Fang Cai

Federal Reserve Board

Francis E. Warnock

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

Multiple version iconThere are 3 versions of this paper

Date Written: May 2006

Abstract

It is an established fact that investors favor the familiar%u2014be it domestic securities or, within a country, the securities of nearby firms%u2014and avoid investments that would provide the greatest diversification benefits. While we do not rule out familiarity as an important driver of portfolio allocations, we provide new evidence of investors%u2019 international diversification motive. In particular, our analysis of the security-level U.S. equity holdings of foreign and domestic institutional investors indicates that institutional investors reveal a preference for domestic multinationals (MNCs), even after controlling for familiarity factors. We attribute this revealed preference to the desire to obtain %u201Csafe%u201D international diversification. We then show that holdings of domestic MNCs are substantial and, after accounting for this home-grown foreign exposure, that the share of %u201Cforeign%u201D equities in investors%u2019 portfolios roughly doubles, reducing (but not eliminating) the observed home bias.

Suggested Citation

Cai, Fang and Warnock, Francis E., International Diversification at Home and Abroad (May 2006). NBER Working Paper No. w12220, Available at SSRN: https://ssrn.com/abstract=902572

Fang Cai

Federal Reserve Board ( email )

Office of Financial Stability Policy and Research
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Francis E. Warnock (Contact Author)

University of Virginia - Darden Business School ( email )

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

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