NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

International Diversification at Home and Abroad

Fang Cai, Francis E. Warnock

NBER Working Paper No. 12220
Issued in May 2006
NBER Program(s):   IFM

It is an established fact that investors favor the familiar—be it domestic securities or, within a country, the securities of nearby firms—and avoid investments that would provide the greatest diversification benefits. While we do not rule out familiarity as an important driver of portfolio allocations, we provide new evidence of investors’ international diversification motive. In particular, our analysis of the security-level U.S. equity holdings of foreign and domestic institutional investors indicates that institutional investors reveal a preference for domestic multinationals (MNCs), even after controlling for familiarity factors. We attribute this revealed preference to the desire to obtain “safe” international diversification. We then show that holdings of domestic MNCs are substantial and, after accounting for this home-grown foreign exposure, that the share of “foreign” equities in investors’ portfolios roughly doubles, reducing (but not eliminating) the observed home bias.

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Document Object Identifier (DOI): 10.3386/w12220

Published: “Foreign Exposure through Domestic Equities”. Finance Research Letters.

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