Why Diversify Internationally When Domestic Diversification Provides Similar Benefits?

30 Pages Posted: 11 Oct 2006

See all articles by Antonios Antoniou

Antonios Antoniou

Wealth Associates

Olasupo Olusi

Durham University - Centre for Empirical Research in Finance

Krishna Paudyal

Independent

Date Written: September 2006

Abstract

In light of investor "home-bias" and recent changes in the characteristics of equity markets around the world, this paper appraises the potential benefits of domestic equity diversification, as an alternative to international diversification. We construct forward-looking "home-made" diversification portfolios to imitate each of thirty-seven foreign equity indices and a world portfolio over a ten-year period. The results show that it is possible to mimic foreign indices with domestic equity assets more than previously reported. The differences in pay-offs from international and domestic portfolios are statistically and economically insignificant. Therefore, investors are not compensated for extra risks attached to international diversification.

Keywords: International Portfolio Diversification, Portfolio Selection, Industry Diversification, Home Bias, Home-Made Diversification

JEL Classification: G11, G15, F20

Suggested Citation

Antoniou, Antonios and Olusi, Olasupo and Paudyal, Krishna N., Why Diversify Internationally When Domestic Diversification Provides Similar Benefits? (September 2006). Available at SSRN: https://ssrn.com/abstract=936637 or http://dx.doi.org/10.2139/ssrn.936637

Antonios Antoniou

Wealth Associates ( email )

Alpine House,
Honeypot Lane
London, NW9 9RX
United Kingdom

Olasupo Olusi (Contact Author)

Durham University - Centre for Empirical Research in Finance ( email )

Durham Business School
Mill Hill Lane
Durham, DH1 3LB
United Kingdom
+44-1913345298 (Phone)
+44-191-3345201 (Fax)

Krishna N. Paudyal

Independent ( email )

No Address Available

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