International portfolio reallocation: Diversification benefits and European monetary union |
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Authors: | Robert A. De Santis,Bruno Gé rard |
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Affiliation: | a DG-Economics, External Developments Division at the European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany b Mellon Capital Management, 595 Market Street, Suite 3000, San Francisco, CA 94105, USA |
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Abstract: | We investigate the determinants of bilateral international equity and bond portfolio reallocation across a large cross-section of countries spanning over two sample periods: 1997-2001 and 1997-2005. We find that the strongest drivers are the marginal diversification benefits arising from the pure asset component and the initial degree of underweight. This evidence suggests that global portfolio reallocations over the asset boom and bust period were determined by optimal diversification considerations. We also find that due to economic and monetary union (EMU) the weight assigned by euro area investors to investment in euro area countries increased significantly in equity and fixed income portfolios, with a trade diverting effect against the British bond market. |
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Keywords: | C13 C21 F37 G11 |
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