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Do investors still benefit from international diversification with investment constraints?

  • Chiou, Wan-Jiun Paul
  • Lee, Alice C.
  • Chang, Chiu-Chi A.
Registered author(s):

    This paper empirically investigates the potential benefits of international diversification for the U.S. investor with various investment constraints from both long-term and time-rolling perspectives. While the addition of portfolio bounds makes asset allocation more feasible, our findings suggest that adding short-selling and over-weighting constraints reduce but do not completely eliminate the diversification benefits of international investment. The over-time analyses show that diversifying portfolios internationally is still beneficial even though financial markets are becoming more integrated. The out-of-sample test suggests that the Markowitz model does not necessarily realize improved mean-variance efficiency but demonstrates risk reduction. The significant time variation in optimal asset allocation implies the necessity for the fund manager to rebalance international portfolio dynamically.

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    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 49 (2009)
    Issue (Month): 2 (May)
    Pages: 448-483

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    Handle: RePEc:eee:quaeco:v:49:y:2009:i:2:p:448-483
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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