Does International Diversification Substitute for Home Bias?

30 Pages Posted: 11 Oct 2010 Last revised: 22 Nov 2010

See all articles by Wing-Keung Wong

Wing-Keung Wong

Asia University, Department of Finance

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory

Mourad Mroua

University of Sfax

Date Written: November 20, 2010

Abstract

Using both mean-variance portfolio optimization (MVPO) and stochastic dominance (SD) approaches, this paper investigates whether international diversification and home bias inertia are substitutes or complements. More specifically, we compare daily closing prices of 30 US stocks and the stock indices from American, Latin American, and Asian financial markets, including both emerging and major markets. Results from the MVPO show that a domestic diversification strategy performs better for any risk level up to 0.5%, whereas international diversification performs better for any risk level higher than 0.5%. Some results from the SD test support international diversification, some promote home bias, and still others conclude that there is no difference between investing domestically and internationally. However, our findings show that one could not find any single internationally diversified portfolio that dominates all domestically diversified portfolios and, similarly, one could not find any single domestically diversified portfolio that dominates all internationally diversified portfolios. Our SD findings also recommends that investors have a “home bias” if they prefer less risk and to be “internationally diversified” if they prefer higher risk.

Keywords: Home Bias, International Diversification, Mean-Variance Portfolio Optimization, Stochastic Dominance, Monte Carlo and Bootstrap P-Values

Suggested Citation

Wong, Wing-Keung and Abid, Fathi and Mroua, Mourad, Does International Diversification Substitute for Home Bias? (November 20, 2010). Available at SSRN: https://ssrn.com/abstract=1690125 or http://dx.doi.org/10.2139/ssrn.1690125

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory ( email )

Road of Airport, Km 4
Sfax, sfax 3018
Tunisia
+216 7427 9154 (Phone)

Mourad Mroua

University of Sfax ( email )

14, Rue de Jugourta
Sfax, 3001
Tunisia
0021698656786 (Phone)

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