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Benefits of international diversification with investment constraints: An over-time perspective

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  • Chiou, Wan-Jiun Paul
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    Abstract

    This paper investigates the benefits and asset allocation of the optimal international diversification for the U.S.A. investor while considering various portfolio constraints. Although the global financial market is becoming more integrated, the findings suggest that adding lower and upper weighting bounds reduces, but does not completely eliminate, the potential economic value of international investment. The addition of investment constraints makes asset allocation more feasible and decreases the volatility in portfolio return. The time-variation in the optimal asset allocation implies that fund managers should rebalance international portfolios dynamically. The out-of-sample test suggests that the Markowitz model with constraints realizes trivial improvement in mean-variance efficiency but still demonstrates significant reduction in risk.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Multinational Financial Management.

    Volume (Year): 19 (2009)
    Issue (Month): 2 (April)
    Pages: 93-110

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    Handle: RePEc:eee:mulfin:v:19:y:2009:i:2:p:93-110

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    Web page: http://www.elsevier.com/locate/mulfin

    Related research

    Keywords: Diversification benefits Investment constraints International portfolio management;

    References

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    Cited by:
    1. Diyarbakirlioglu, Erkin, 2011. "Domestic and foreign country bias in international equity portfolios," Journal of Multinational Financial Management, Elsevier, vol. 21(5), pages 301-329.

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