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The benefits of international diversification: market development, corporate governance, market cap, and structural change effects

Lorne Switzer () and Cagdas Tahaoglu

International Review of Financial Analysis, 2015, vol. 42, issue C, 76-97

Abstract: This paper examines the benefits of international diversification for US investors, while accounting for market development, corporate governance, market cap effects, and structural change across countries over the period August 1996–July 2013. Improved risk adjusted returns are obtained from a diversified portfolio consisting of a mix of developed and emerging countries. Additionally, we find that diversification benefits are not significant for most of the small-cap foreign assets when an investor already holds a position in corresponding country-large-cap assets. Diversification benefits based on the governance effectiveness of a country's companies are not ubiquitous. We find that economically significant improvements in risk-return performance can be attained by adding large caps of developed countries with high and low overall Governance Metrics International (GMI) ratings and large and small caps of emerging countries with low overall GMI ratings to the investment universe containing the assets of common law developed countries. However, diversification benefits are economically significant only for large and small caps of low GMI emerging countries when short selling is not allowed.

Keywords: International diversification; Emerging markets; Corporate governance; Size effects; Portfolio performance (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G15 G34 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.irfa.2014.11.010

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