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Testing for Mean-Variance Spanning with Short Sales Constraints and Transaction Costs: The Case of Emerging Markets

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  • Frans A. de Roon
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    Abstract

    We propose regression-based tests for mean-variance spanning in the case where investors face market frictions such as short sales constraints and transaction costs. We test whether U.S. investors can extend their efficient set by investing in emerging markets when accounting for such frictions. For the period after the major liberalizations in the emerging markets, we find strong evidence for diversification benefits when market frictions are excluded, but this evidence disappears when investors face short sales constraints or small transaction costs. Although simulations suggest that there is a possible small-sample bias, this bias appears to be too small to affect our conclusions. Copyright The American Finance Association 2001.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 56 (2001)
    Issue (Month): 2 (04)
    Pages: 721-742

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    Handle: RePEc:bla:jfinan:v:56:y:2001:i:2:p:721-742

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    Cited by:
    1. Stefano Herzel, Stefano & Marco Nicolosi, Marco & Starica, Catalin, 2010. "The cost of sustainability on optimal portfolio choices," Sustainable Investment and Corporate Governance Working Papers 2010/15, Sustainable Investment Research Platform.
    2. Michael R. Powers & David M. Schizer & Martin Shubik, 2003. "Market Bubbles and Wasteful Avoidance: Tax and Regulatory Constraints on Short Sales," Cowles Foundation Discussion Papers 1413, Cowles Foundation for Research in Economics, Yale University.
    3. Post, G.T., 2001. "Spanning and Intersection: a stochastic dominance approach," ERIM Report Series Research in Management ERS-2001-63-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    4. Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R., 2006. "The adequacy of investment choices offered by 401(k) plans," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1299-1314, August.
    5. de Roon, Frans & Eichholtz, Piet & Koedijk, Kees, 2002. "The Portfolio Implications of Home Ownership," CEPR Discussion Papers 3501, C.E.P.R. Discussion Papers.
    6. Jiang, Chonghui & Ma, Yongkai & An, Yunbi, 2013. "International portfolio selection with exchange rate risk: A behavioural portfolio theory perspective," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 648-659.
    7. Paul Chiou & Cheng-Few Lee, 2013. "Do investors still benefit from culturally home-biased diversification? An empirical study of China, Hong Kong, and Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 341-381, February.
    8. van der Hart, Jaap & Slagter, Erica & van Dijk, Dick, 2003. "Stock selection strategies in emerging markets," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 105-132, February.
    9. Eiling, Esther & Gerard, Bruno & Hillion, Pierre & de Roon, Frans A., 2012. "International portfolio diversification: Currency, industry and country effects revisited," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1249-1278.
    10. Szafarz, Ariane & Brière, Marie, 2011. "Investment in Microfinance Equity : Risk, Return, and Diversification Benefits," Economics Papers from University Paris Dauphine 123456789/7858, Paris Dauphine University.
    11. Galvani, Valentina & Plourde, André, 2013. "Spanning with futures contracts," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 61-72.
    12. Thapa, Chandra & Poshakwale, Sunil S., 2012. "Country-specific equity market characteristics and foreign equity portfolio allocation," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 189-211.
    13. Jing-zhi Huang & Zhaodong Zhong, 2013. "Time Variation in Diversification Benefits of Commodity, REITs, and TIPS," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 152-192, January.

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