Keywords: International banking, portfolio diversification, international integration.
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.
Full paper (321 KB PDF)
Home | FEDS | List of 2004 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: June 2, 2004