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International Diversification and Estimation Risk: Australian Evidence

Author

Listed:
  • H. Y. Izan

    (Department of Accounting and Finance, University of Western Australia, Nedlands WA 6009, Australia.)

  • B. R. Jalleh

    (Department of Accounting and Finance, University of Western Australia, Nedlands WA 6009, Australia.)

  • L. L. Ong

    (Department of Accounting and Finance, University of Western Australia, Nedlands WA 6009, Australia.)

Abstract

This paper examines whether the benefits to the Australian investor from international diversification documented by previous Australian studies are still present when we control for estimation risk. The perfor Mance of the Bayes-Stein international portfolio which controls directly for such risk is compared to the perfor Mance of three other international portfolios and the Australian index. The results confirm the existence of those benefits: strategies that control for estimation risk dominate those that do not. Strategies that hedge against foreign currency fluctuations are also found to significantly dominate their unhedged counterpart.

Suggested Citation

  • H. Y. Izan & B. R. Jalleh & L. L. Ong, 1991. "International Diversification and Estimation Risk: Australian Evidence," Australian Journal of Management, Australian School of Business, vol. 16(1), pages 73-90, June.
    • Handle: RePEc:sae:ausman:v:16:y:1991:i:1:p:73-90
    DOI: 10.1177/031289629101600105
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    References listed on IDEAS

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    1. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-675, September.
    2. K.W. Clements & J. Freebairn, 1990. "Exchange Rates and Australian Commodity Exports," Economics Discussion / Working Papers 90-09, The University of Western Australia, Department of Economics.
    3. Eun, Cheol S & Resnick, Bruce G, 1988. " Exchange Rate Uncertainty, Forward Contracts, and International Portfolio Selection," Journal of Finance, American Finance Association, vol. 43(1), pages 197-215, March.
    4. Lessard, Donald R, 1973. "International Portfolio Diversification: A Multivariate Analysis for a Group of Latin American Countries," Journal of Finance, American Finance Association, vol. 28(3), pages 619-633, June.
    5. K.W. Clements, 1990. "The Economic Research Centre," Economics Discussion / Working Papers 90-23, The University of Western Australia, Department of Economics.
    6. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-278, July.
    7. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(3), pages 279-292, September.
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    Cited by:

    1. Gupta, R. & Donleavy, G.D., 2009. "Benefits of diversifying investments into emerging markets with time-varying correlations: An Australian perspective," Journal of Multinational Financial Management, Elsevier, vol. 19(2), pages 160-177, April.
    2. Walsh, David M. & Walsh, Kathleen D. & Evans, John P., 1998. "Assessing estimation error in a tracking error variance minimisation framework," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 175-192, May.

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