The International DiversiÞcation Puzzle Revisited: A Stochastic Dominance Analysis of High-Frequency Data
نویسندگان
چکیده
This paper revisits the international portfolio diversiÞcation using recent high-frequency international stock return series based on the MSCI index funds. Despite considerable increase in foreign stock holdings by the U.S investor from 1% to 15% in the last 25 years, the traditional mean-variance approach still implies the presence of home bias. For the purpose of investigating the desirable portfolio in terms of second-order stochastic dominance, we develop a nonparametric testing procedure designed to be used with high-frequency data and be robust to nonstationarity. The test utilizes the subsampling procedure since the limiting distribution of the test statistics depends on unknown data-generating processes. The result from a small-scale Monte Carlo simulation shows the good Þnite sample performance with a sample size used in empirical analysis. When our procedure is applied to the MSCI index fund returns data, we Þnd that: (i) investment in domestic assets is found to be more efficient than in foreign assets based on the second-order stochastic dominance and spatial dominance criteria; (ii) home bias is conÞrmed in terms of the secondorder dominance for both threeand nine-country cases, when returns are deÞned as the combination of overnight and daytime returns; and (iii) somewhat weaker evidence of home bias is obtained when the test is applied to intraday returns only. This version: May 2006 JEL ClassiÞcation: C12, C32, G11, G15.
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