Does International Diversification Substitute Home Bias : An Application of a Non Parametric Stochastic Dominance Approach

32 Pages Posted: 23 Apr 2007 Last revised: 23 Feb 2010

See all articles by Fathi Abid

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory

Mourad Mroua

University of Sfax

Wing-Keung Wong

Asia University, Department of Finance

Date Written: March 29, 2007

Abstract

Using non-parametric stochastic dominance approach this paper investigates whether international diversification and home bias inertia are substitutes or complements. More specifically it applies, on a data set consisting of daily closing prices of US stocks and index and Asian and Latin American stock market indices for the period from April 1st to October 29, 2004, Barrett and Donald [6], Monte Carlo and bootstrapped p-values to generate stochastic dominance relationships.

Empirical results show that international and domestic diversifications seem to be complementary strategies for American investors since no dominance relationships were revealed. However, substitutability can be shown according to risk aversion degree. For low risk aversion coefficient, domestic diversified portfolios, first-second stochastically dominate global and international diversified portfolios in 70 percent of cases in average. Inversely, for high risk aversion coefficient, globally and internationally diversification strategies are preferred to efficient domestic diversification one. Global diversification behaves more as a substitute than a complement to international major and emerging diversification strategies for risk-adverse American investors.

Keywords: Home bias, International diversification, Non-parametric stochastic dominance approach, Monte Carlo and Bootstrap p-values.stochastic dominance approach, Monte Carlo and Bootstrap p-values

Suggested Citation

Abid, Fathi and Mroua, Mourad and Wong, Wing-Keung, Does International Diversification Substitute Home Bias : An Application of a Non Parametric Stochastic Dominance Approach (March 29, 2007). Available at SSRN: https://ssrn.com/abstract=977153 or http://dx.doi.org/10.2139/ssrn.977153

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory ( email )

Road of Airport, Km 4
Sfax, sfax 3018
Tunisia
+216 7427 9154 (Phone)

Mourad Mroua (Contact Author)

University of Sfax ( email )

14, Rue de Jugourta
Sfax, 3001
Tunisia
0021698656786 (Phone)

Wing-Keung Wong

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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