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

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  • Chiou, Wan-Jiun Paul

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.

Suggested Citation

  • Chiou, Wan-Jiun Paul, 2009. "Benefits of international diversification with investment constraints: An over-time perspective," Journal of Multinational Financial Management, Elsevier, vol. 19(2), pages 93-110, April.
  • Handle: RePEc:eee:mulfin:v:19:y:2009:i:2:p:93-110
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    Citations

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    Cited by:

    1. Ephraim Clark & Konstantinos Kassimatis, 2013. "International equity flows, marginal conditional stochastic dominance and diversification," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 251-271, February.
    2. Mensah, Jones Odei & Premaratne, Gamini, 2014. "Exploring Diversification Benefits in Asia-Pacific Equity Markets," MPRA Paper 60180, University Library of Munich, Germany.
    3. Mourad Mroua & Fathi Abid, 2014. "Portfolio revision and optimal diversification strategy choices," International Journal of Managerial Finance, Emerald Group Publishing, vol. 10(4), pages 537-564, August.
    4. Fathi Abid & Pui Lam Leung & Mourad Mroua & Wing Keung Wong, 2014. "International Diversification Versus Domestic Diversification: Mean-Variance Portfolio Optimization and Stochastic Dominance Approaches," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 7(2), pages 1-22, May.
    5. repec:rss:jnljef:v4i1p6 is not listed on IDEAS
    6. Diyarbakirlioglu, Erkin, 2011. "Domestic and foreign country bias in international equity portfolios," Journal of Multinational Financial Management, Elsevier, vol. 21(5), pages 301-329.
    7. Yunus, Nafeesa, 2015. "Trends and convergence in global housing markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 100-112.
    8. Erkin Diyarbakirlioglu, 2011. "Foreign equity flows and the "Size Bias" : Evidence from an emerging stock market," Post-Print hal-01127657, HAL.
    9. Kamil, Nazrol & Bacha, Obiyadulla & Masih, Mansur, 2014. "Is There A Diversification “Cost” of Shari’ah Compliance? Empirical Evidence from Malaysian Equities," MPRA Paper 56951, University Library of Munich, Germany.
    10. 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.

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