Do investors still benefit from international diversification with investment constraints?

Chiou, Wan-Jiun Paul, Alice C. Lee and Chang, Chiu-Chi A.

The Quarterly Review of Economics and Finance, 2009, vol. 49, issue 2, pages 448-483

Abstract: This paper empirically investigates the potential benefits of international diversification for the U.S. investor with various investment constraints from both long-term and time-rolling perspectives. While the addition of portfolio bounds makes asset allocation more feasible, our findings suggest that adding short-selling and over-weighting constraints reduce but do not completely eliminate the diversification benefits of international investment. The over-time analyses show that diversifying portfolios internationally is still beneficial even though financial markets are becoming more integrated. The out-of-sample test suggests that the Markowitz model does not necessarily realize improved mean-variance efficiency but demonstrates risk reduction. The significant time variation in optimal asset allocation implies the necessity for the fund manager to rebalance international portfolio dynamically.

Keywords: Short-sales; constraints; Over-weighting; investment; constraints; International; diversification (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:quaeco:v:49:y:2009:i:2:p:448-483

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