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An Optimal World Portfolio on the Eve of World War I: Was There a Bias to Investing in the New World Rather Than in Europe?

  • Cécile Edlinger (a1), Maxime Merli (a2) and Antoine Parent (a3)

Abstract

The geographical distributions of French and British foreign investment portfolios differ markedly before World War I. Did French portfolios favor European investments just as British portfolios favored “New World” assets? Should economic rationality have encouraged investors to invest widely in the “New World” rather than in Europe? Combining Modern Portfolio Theory and a new data set comprising assets listed on the Paris and London Stock Exchanges, we show that investing in the “New World” did not yield higher returns than investing in Europe. The “European preference” of the Paris Bourse and, by extension, of French investors was not inefficient.

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We wish to thank Jan Annaert, Marc Deloof, Frans Buelens, the participants to the seventh Beta-Workshop in Historical Economics, Claude Diebolt, John A. James, and the participants to the session, “New Data and New Methods of Time Series Analysis in Cliometrics” of the XVIth World Economic History Congress, Stellenbosch, 2012. Our special acknowledgements go to David Le Bris and Amir Rezaee for kindly providing new data on historical CAC40 and French bond index and to Angelo Riva, Patrick Roger, Michael Edelstein, William Goetzmann, and Andrey Ukhov for helpful suggestions. We are also deeply grateful to the editor for patient reading and constructive remarks and two anonymous referees for relevant suggestions. All remaining errors and inadequacies are our own.

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An Optimal World Portfolio on the Eve of World War I: Was There a Bias to Investing in the New World Rather Than in Europe?

  • Cécile Edlinger (a1), Maxime Merli (a2) and Antoine Parent (a3)

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