Should you globally diversify or let the globally diversified firm do it for you?

Farooqi, Javeria; Huerta, Daniel; Ngo, Thanh

doi:10.1016/j.qref.2015.02.005

Cited by 11 publications

(6 citation statements)

References 34 publications

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“…Fillat, Garetto, and Oldenski () find that MNCs offer diversification benefits and higher risk premia for higher risk. Farooqi et al () find that investing in MNCs offers higher returns relative to investor‐made internationally diversified portfolios. They suggest that investors are willing to pay a premium for globally diversified firms to achieve indirect international exposure, as internationalized firms can take greater advantage of tax, institutional, and legal differences between countries than is possible for an investor.…”

Section: Discussion Of the Literaturementioning

confidence: 99%

“…Our sample of MNCs represents firms with consistently high levels of internationalization, spread across many regions. As noted by Farooqi et al (2015), these firms will outperform an internationally diversified portfolio because of firm-specific advantages, such as intangible assets, economies of scale and scope, and specialized human capital among others. In addition, investors cannot take advantage of different taxation or legal environments as corporations do.…”

Section: Discussionmentioning

confidence: 99%

“…Despite these benefits and despite the reduction of many barriers to international investment, investors hold a disproportionate amount of their investments domestically, known as the home bias puzzle (Abid, Leung, Mroua, & Wong, 2014;Abid, Mroua, & Wong, 2013;Ahearne, Griever, & Warnock, 2004;French & Poterba, 1991;VanNieuwerburgh & Veldkamp, 2009). Although investing domestically may appear to be a suboptimal investment strategy, recent studies find that many of the benefits of international diversification can be achieved indirectly by investing in multinational corporations (MNCs; Cai & Warnock, 2012;Farooqi, Huerta, & Ngo, 2015;O'Hagan-Luff & Berrill, 2015).…”

Section: Introductionmentioning

confidence: 99%

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The international diversification benefits of U.S.‐traded equity products

O'Hagan‐Luff

Berrill

2018

Int. J Fin Econ

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The benefits of international diversification for equity investors have been highlighted for decades. Despite the reduction of many previous barriers to foreign investment, investors are found to persistently overweight domestic equities. This paper examines whether the benefits of international diversification are available via U.S.‐traded equity products over a 15‐year period between 1996 and 2011. The equity products investigated are multinational corporations (MNCs), American depository receipts (ADRs), single‐country exchange‐traded funds, iShares, and closed‐end country funds. Mean‐variance spanning tests and Sharpe ratio analysis reveal that portfolios of ADRs and MNCs offer the greatest international diversification benefits to U.S. investors in a domestic setting. Whereas the benefits of international diversification vary during periods of differing market conditions, the findings for ADRs and MNCs remain robust. We conclude that it is possible to reap the benefits of international diversification via U.S.‐traded equity products but that the benefits of different equity types vary significantly.

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Section: Discussion Of the Literaturementioning

confidence: 99%

Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The international diversification benefits of U.S.‐traded equity products

O'Hagan‐Luff

Berrill

2018

Int. J Fin Econ

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“…Despite the benefits of international diversification, however, financial investors keep an enormous share of their investments domestically (Abid et al 2014;Van Niuwerburgh and Veldkamp 2009;French and Poterba 1991). Investing in multinational corporations within the country provides risk benefits on an identical scale as investing internationally (Farooqi et al 2015;Cai and Warnock 2012). A series of studies investigated diversification benefits of investing in the domestic companies that operate on a multinational scale (Berrill et al 2019;Aliu et al 2019;Errunza et al 1999).…”

Section: Literature Reviewmentioning

confidence: 99%

Modeling the Optimal Portfolio: the Case of the Largest European Stock Exchanges

Aliu

Nuhiu

Krasniqi

et al. 2020

CER

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Portfolio optimization is the main concern for portfolio managers. Financial securities are placed within the portfolio based on the investor’s risk tolerance. The study measures the risk-reward relationship when the number of stocks in the portfolio increases. Six diverse portfolios have been created with a different number of stocks, such as portfolios with 47 stocks, 95 stocks, 142 stocks, 190 stocks, 239 stocks, and 287 stocks. Stock prices and trading volume were collected on a weekly basis from the six largest European stock exchanges (FTSE100, CAC40, FTSE MIB, IBEX35, DAX, and MDAX). Markowitz’s (1952) diversification formula has been used to measure the risk level of the individual portfolios. The results of the study show that the diversification risk constantly decreases when we move from the portfolios with 47 stocks to the portfolios with 287 stocks. The weighted average returns increase on the portfolios with a higher number of stocks, which is contrary to the standard portfolio theories. The results of the study indicate managerial implications for financial investors that are focused exclusively on the largest European stock exchanges.

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“…Investors continue to display a reluctance to invest in either geographic or culturally distant countries. Although similar benefits to overseas investments can be achieved via investment in internationalised firms (see Farooqi et al (2015), Fillat et al (2015) and Krapl (2015)), investors do not seem to recognise these benefits. Investors could invest more heavily in internationalised firms as a hedge for domestic exposure, especially in times of declining domestic markets.…”

Section: Equity Marketsmentioning

confidence: 99%

Future directions in international financial integration research - A crowdsourced perspective

Lucey

Vigne

Ballester

et al. 2018

International Review of Financial Analysis

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This paper is the result of a crowdsourced effort to surface perspectives on the present and future direction of international finance. The authors are researchers in financial economics who attended the INFINITI 2017 conference in the University of Valencia in June 2017 and who participated in the crowdsourcing via the Overleaf platform. This paper highlights the actual state of scientific knowledge in a multitude of fields in finance and proposes different directions for future research.

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Should you globally diversify or let the globally diversified firm do it for you?

Cited by 11 publications

References 34 publications

The international diversification benefits of U.S.‐traded equity products

The international diversification benefits of U.S.‐traded equity products

Modeling the Optimal Portfolio: the Case of the Largest European Stock Exchanges

Future directions in international financial integration research - A crowdsourced perspective

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