Domestically Formed International Diversification

Date

2019-12-24

Advisors

Journal Title

Journal ISSN

ISSN

0261-5606

Volume Title

Publisher

Elsevier

Type

Article

Peer reviewed

Yes

Abstract

We examine whether portfolios of U.S. stocks can mimic foreign index returns thereby providing investors with the benefits of international diversification without investing directly in assets that trade abroad. We study 7 developed markets and 8 emerging markets over 1975-2013. Portfolios of U.S. stocks are constructed out-of-sample to mimic these international indices using a range of domestically available assets. We show that investors can gain considerable exposure to foreign indices using domestically traded stocks. Results indicate increases in exposure to the foreign market are strongest when emerging markets are mimicked. Our out-of-sample portfolio choice analysis shows that for most cases mimicking portfolios can be a good substitute for direct foreign investment. Hence, a possible explanation for the high proportion of domestic stocks held by investors and fund managers is that such assets are sufficient to provide much of the benefits of international diversification without directly investing abroad.

Description

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.

Keywords

International diversification, Home bias, Mean-variance spanning, Portfolio choice

Citation

Lu, Q. and Vivian, A. (2019) Domestically formed international diversification. Journal of International Money and Finance, p.102131.

Rights

Research Institute

Finance and Banking Research Group (FiBRe)