Is International Portfolio Diversification Relevant for the Eurozone Investor?

Abstract

This paper evaluates the relevance of an international equity diversification strategy to a home-biased German investor by comparing the payoffs from such a strategy with those from domestic diversification. Following the removal of an important investment barrier - exchange rate risks in eurozone markets, we assess whether the investor's portfolio performance improves significantly by diversifying across euro area equity markets, rather than in Germany only. The results reveal that the investor will benefit significantly from adopting an international diversification strategy. However, these benefits are exhausted by diversifying within the eurozone. Payoffs from equity acquisitions across the rest of the world are statistically and economically insignificant.

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

JEL Classification: G11, G15, F20