Do foreign stocks substitute for international diversification?

Abstract

Using a novel sample of foreign securities available for trade in 42 countries during the last four decades (1979-2018), we examine the rise in importance of foreign stocks for investors in their host countries and its implications for diversification across industries and countries. The availability of foreign stocks allows domestic investors to increase their international diversification from home by investing in these stocks. We conclude that including foreign stocks in portfolio investments offers an effective substitute for international diversification, and contributes significantly towards increasing the integration of global markets.

Rodolfo G. Campos

Economist

My research interests include macroeconomics, social insurance, and international economics.