Cross-Border Diversification in Bank Asset Portfolios

By Claudia M. Buch, John C. Driscoll, C. Ostergaard. Social Science Research Network, 2004

142 citations recorded by the source corpus.

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.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/bff4994820c7a8d3c2947d0d52cc75c88ff9082e

Citations in the corpus

• Foreign Participation in Local-Currency Bond Markets (2004, unknown): “This question is of particular interest for 2 While equities have been the main focus of the literature on international portfolio allocation, recent work by Buch, Driscoll, and Ostergaard (2004) examines the international diversification of banks’ portfolios.”
• Home bias and international risk sharing: Twin puzzles separated at birth (2007, unknown): “5 Buch et al. (2005) show that banks over-invest domestically relative to simple benchmarks.”