TY - JOUR
T1 - Should Americans invest internationally? Mean-variance portfolios optimization and stochastic dominance approaches
AU - Abid, Fathi
AU - Mroua, Mourad
AU - Wong, Wing Keung
N1 - Copyright:
Copyright 2013 Elsevier B.V., All rights reserved.
PY - 2013
Y1 - 2013
N2 - 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.
AB - 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.
KW - Home bias
KW - international diversification
KW - mean-variance portfolio optimization
KW - Monte Carlo and bootstrap p-values
KW - stochastic dominance
UR - http://www.scopus.com/inward/record.url?scp=84884566867&partnerID=8YFLogxK
U2 - 10.3233/RDA-2012-0084
DO - 10.3233/RDA-2012-0084
M3 - Journal article
AN - SCOPUS:84884566867
SN - 1569-7371
VL - 4
SP - 89
EP - 102
JO - Risk and Decision Analysis
JF - Risk and Decision Analysis
IS - 2
ER -