Do Investors Still Benefit from Culturally Home-biased Diversification? An Empirical Study of China, Hong Kong, and Taiwan

Paul W. Chiou and Cheng Few Lee

Chapter 19 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 667-716 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Due to the continual economic integration and the accumulation of wealth in China, Hong Kong, and Taiwan since early 1990’s, understanding portfolio strategies and the benefits of diversification for these countries is an indispensible element in managing global assets. Using weekly industry-level data, we analyze the culturally home-biased diversification and find that local investors still benefit from regional investments. The time-varying benefits of diversification exist even as the economies of this region have become increasingly integrated. Our analysis suggests that stricter weighting bounds reduce the economic values of diversification but enhance the feasibility of the optimal portfolio allocations. The larger benefits gained by Chinese investors suggest that international diversification is more advantageous to investors in emerging economies than those in developed markets. The robustness tests generate similar findings when we evaluate the out-of-sample effectiveness and the benefits of diversification under various parameter estimation windows.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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