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Domestically formed international diversification

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journal contribution
posted on 07.01.2020, 13:27 by Qinye Lu, Andrew VivianAndrew Vivian
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.

History

School

  • Business and Economics

Department

  • Business

Published in

Journal of International Money and Finance

Volume

103

Publisher

Elsevier BV

Version

AM (Accepted Manuscript)

Rights holder

© Elsevier

Publisher statement

This paper was accepted for publication in the journal Journal of International Money and Finance and the definitive published version is available at https://doi.org/10.1016/j.jimonfin.2019.102131

Acceptance date

17/12/2019

Publication date

2019-12-24

Copyright date

2019

ISSN

0261-5606

Language

en

Depositor

Prof Andrew Vivian Deposit date: 2 January 2020

Article number

102131