Working Paper
Cross-border diversification in bank asset portfolios
Abstract: Taking the mean-variance portfolio model as a benchmark, we compute the optimally diversified portfolio for banks located in France, Germany, the U.K., and the U.S. under different assumptions about currency hedging. We compare these optimal portfolios to the actual cross-border assets of banks from 1995-1999 and try to explain the deviations. We find that banks over-invest domestically to a considerable extent and that cross-border diversification entails considerable gain. Banks underweight countries which are culturally less similar or have capital controls in place. Capital controls have a strong impact on the degree of underinvestment whereas less political risk increases the degree of over-investment.
Keywords: Investments, Foreign;
Access Documents
File(s): File format is text/html http://www.federalreserve.gov/pubs/feds/2004/200426/200426abs.html
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/2004/200426/200426pap.pdf
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2004
Number: 2004-26