 Optimal and naive diversification in an emerging market: Evidence from China's A‐shares marketCheng Yan and Ji Yan International Journal of Finance & Economics, 2021, vol. 26, issue 3, 3740-3758 Abstract: This paper empirically investigates the out‐of‐sample performance of the 1/N naive rule and the Markowitz mean–variance strategies in the largest emerging market (i.e., China's A‐shares market) and provides three new findings. First, we show that some mean–variance optimization strategies can outperform the 1/N rule in China's A‐shares market, while minimum‐variance strategies cannot. Using certainty equivalent return (CER) instead of Sharpe ratios does not change our results qualitatively. Second, we find an obvious advantage of mean–variance optimization when N is large. Third, when transaction costs are taken into account, the profitability of the unconstrained mean–variance optimizations almost vanishes, while the profitability of the mean–variance optimizations with the short‐sale constraint remains. Our results are robust to using a shorter estimation window of about 60 months. These results provide support for the use of optimal diversification strategies in emerging markets. Date: 2021 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:26:y:2021:i:3:p:3740-3758 Ordering information: This journal article can be ordered from Access Statistics for this article International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd. |
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