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International portfolio diversification is better than you think

Coeurdacier, Nicolas and Guibaud, Stéphane (2011) International portfolio diversification is better than you think. Journal of International Money and Finance, 30 (2). pp. 289-308. ISSN 0261-5606

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Using aggregate data on bilateral cross-border equity holdings, we investigate whether investors correctly hedge their over-exposure to domestic risk (the well-known equity home bias) by investing in foreign stock markets that have low correlation with their home stock market. To deal with the endogeneity of stock return correlations, we instrument current correlations with past correlations. Controlling for many determinants of international portfolios, we find that, all else equal, investors do tilt their foreign holdings towards countries, which offer better diversification opportunities. The diversification motive that we uncover is stronger for source countries exhibiting a higher level of home bias.

Item Type: Article
Official URL:
Additional Information: © 2010 Elsevier Ltd.
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 08 Feb 2011 11:42

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