Document Type

Journal Article

Department/Unit

Department of Economics

Title

Should Americans invest internationally? mean–variance portfolios optimization and stochastic dominance approaches

Language

English

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 for Americans. 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. At last, our SD findings also recommends that the US investors have a 'home bias' if they prefer less risk and to be 'internationally diversified' if they prefer higher risk. © 2013-IOS Press and the authors.

Keywords

Home bias, international diversification, mean-variance portfolio optimization, Monte Carlo and bootstrap p-values, stochastic dominance

Publication Date

2013

Source Publication Title

Risk and Decision Analysis

Volume

4

Issue

2

Start Page

89

End Page

102

Publisher

IOS Press

DOI

10.3233/RDA-2012-0084

Link to Publisher's Edition

http://dx.doi.org/10.3233/RDA-2012-0084

ISSN (print)

15697371

ISSN (electronic)

18759173

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