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Do investors still benefit from international diversification with investment constraints?

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  • Chiou, Wan-Jiun Paul
  • Lee, Alice C.
  • Chang, Chiu-Chi A.

Abstract

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.

Suggested Citation

  • Chiou, Wan-Jiun Paul & Lee, Alice C. & Chang, Chiu-Chi A., 2009. "Do investors still benefit from international diversification with investment constraints?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 448-483, May.
  • Handle: RePEc:eee:quaeco:v:49:y:2009:i:2:p:448-483
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    Cited by:

    1. Wolff, Dominik & Bessler, Wolfgang & Opfer, Heiko, 2012. "Multi-Asset Portfolio Optimization and Out-of-Sample Performance: An Evaluation of Black-Litterman, Mean Variance and Naïve Diversification Approaches," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62020, Verein für Socialpolitik / German Economic Association.
    2. Mansourfar, Gholamreza & Mohamad, Shamsher & Hassan, Taufiq, 2010. "The behavior of MENA oil and non-oil producing countries in international portfolio optimization," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 415-423, November.
    3. 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.
    4. Mensah, Jones Odei & Premaratne, Gamini, 2014. "Exploring Diversification Benefits in Asia-Pacific Equity Markets," MPRA Paper 60180, University Library of Munich, Germany.
    5. 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.
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    7. repec:bec:imsber:v:9:y:2017:i:3:p:1-35 is not listed on IDEAS
    8. Farooqi, Javeria & Huerta, Daniel & Ngo, Thanh, 2015. "Should you globally diversify or let the globally diversified firm do it for you?," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 75-85.
    9. 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.
    10. Charfeddine, Lanouar & Najah, Ahlem & Teulon, Frédéric, 2016. "Socially responsible investing and Islamic funds: New perspectives for portfolio allocation," Research in International Business and Finance, Elsevier, vol. 36(C), pages 351-361.
    11. Erkin Diyarbakirlioglu, 2011. "Foreign equity flows and the "Size Bias" : Evidence from an emerging stock market," Post-Print hal-01127657, HAL.
    12. 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.

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