TY  - JOUR
AU  - Rowland,Patrick F.
AU  - Tesar,Linda L.
TI  - Multinationals and the Gains from International Diversification
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6733
PY  - 1998
Y2  - September 1998
UR  - http://www.nber.org/papers/w6733
L1  - http://www.nber.org/papers/w6733.pdf
N1  - Author contact info:
Linda Tesar
Department of Economics
University of Michigan
Ann Arbor, MI  48109-1220
Tel: 734/763 6015
Fax: 734/764-2769
E-Mail: ltesar@umich.edu
AB  - One possible explanation for home bias is that investors may obtain indirect international diversification benefits by investing in multinational firms rather than by investing directly in foreign markets. This paper employs mean-variance spanning tests to examine the diversification potential of multinational firms and foreign market indices for investors domiciled in Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. We find that in most countries and most time periods, the portfolio of domestic stocks spans the risk and return opportunities of a portfolio that includes domestic and multinational stocks. However, there is weak evidence that U.S. multinationals provided global diversification benefits in the full 1984-92 sample and in the post-1987 subsample. We also find that the addition of foreign market indices to a domestic portfolio - inclusive of multinationals - provides diversification benefits. The economic importance of the shift of the portfolio frontier - measured as the utility gain from diversification - varies considerably from market to market and often reflects the benefits of large short positions in certain markets.
ER  -