School of Economics and Finance
Room 908. 9/F, K.K. Leung Building
Pokfulam Road, Hong Kong
Institutional Affiliation: The University of Hong Kong
NBER Working Papers and Publications
|December 2012||Are the Gains from Foreign Diversification Diminishing? Assessing the Impact with Cross-listed Stocks|
with Karen K. Lewis: w18627
How important is foreign diversification? In this paper, we re-examine this question motivated by findings from the literature about foreign companies that are listed on US exchanges. Specifically, domestic portfolios including cross-listed stocks can provide the same diversification as foreign market returns without the need for US investors to go abroad. At the same time, the betas of these foreign stock returns against the US market increase after cross-listing, suggesting diversification worsens over time. In this paper, we assess the impact of these changes on foreign diversification for a US investor. We test for and estimate breaks in the sensitivity of individual foreign stocks listed on US exchanges. We find that roughly half of the changes in betas arise from greater integration ...