IDEAS home Printed from https://ideas.repec.org/a/kap/fmktpm/v36y2022i3d10.1007_s11408-021-00397-1.html
   My bibliography  Save this article

Exploring the diversification benefits of US international equity closed-end funds

Author

Listed:
  • Jonathan Fletcher

    (University of Strathclyde)

Abstract

I use the simulation approach of Jobson and Korkie (J Portfolio Manag 7:70–74, 1981), combined with Michaud optimization (Michaud and Michaud, Efficient asset management: a practical guide to stock portfolio optimization and asset allocation, Oxford University Press, Oxford, 2008), to evaluate whether US international equity closed-end funds (CEF) provide out-of-sample diversification benefits. My study finds that international CEF do not provide diversification benefits across the whole sample period. However, the out-of-sample diversification benefits of international CEF do vary across economic states. I find that there are significant diversification benefits when the lagged one-month US Treasury Bill return is lower than normal, and when higher than normal, regardless of the benchmark investment universe used.

Suggested Citation

  • Jonathan Fletcher, 2022. "Exploring the diversification benefits of US international equity closed-end funds," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(3), pages 297-320, September.
  • Handle: RePEc:kap:fmktpm:v:36:y:2022:i:3:d:10.1007_s11408-021-00397-1
    DOI: 10.1007/s11408-021-00397-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11408-021-00397-1
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1007/s11408-021-00397-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tu, Jun & Zhou, Guofu, 2011. "Markowitz meets Talmud: A combination of sophisticated and naive diversification strategies," Journal of Financial Economics, Elsevier, vol. 99(1), pages 204-215, January.
    2. Gabriel Perez‐Quiros & Allan Timmermann, 2000. "Firm Size and Cyclical Variations in Stock Returns," Journal of Finance, American Finance Association, vol. 55(3), pages 1229-1262, June.
    3. Fletcher, Jonathan, 2018. "An empirical examination of the diversification benefits of U.K. international equity closed-end funds," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 23-34.
    4. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-349, June.
    5. Michaud, Richard O. & Michaud, Robert O., 2008. "Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation," OUP Catalogue, Oxford University Press, edition 2, number 9780195331912, November.
    6. Olivier Ledoit & Michael Wolf, 2017. "Nonlinear Shrinkage of the Covariance Matrix for Portfolio Selection: Markowitz Meets Goldilocks," Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4349-4388.
    7. Liu, Edith X., 2016. "Portfolio Diversification and International Corporate Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(3), pages 959-983, June.
    8. Dashan Huang & Fuwei Jiang & Jun Tu & Guofu Zhou, 2015. "Investor Sentiment Aligned: A Powerful Predictor of Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 791-837.
    9. Wayne E. Ferson & Sergei Sarkissian & Timothy T. Simin, 2003. "Spurious Regressions in Financial Economics?," Journal of Finance, American Finance Association, vol. 58(4), pages 1393-1413, August.
    10. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
    11. Kan, Raymond & Zhou, Guofu, 2007. "Optimal Portfolio Choice with Parameter Uncertainty," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(3), pages 621-656, September.
    12. Mark M. Carhart & Jennifer N. Carpenter & Anthony W. Lynch & David K. Musto, 2002. "Mutual Fund Survivorship," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1439-1463.
    13. Wayne E. Ferson & Sergei Sarkissian & Timothy T. Simin, 2003. "Spurious Regressions in Financial Economics?," Journal of Finance, American Finance Association, vol. 58(4), pages 1393-1414, August.
    14. Vihang Errunza & Ked Hogan & Mao‐Wei Hung, 1999. "Can the Gains from International Diversification Be Achieved without Trading Abroad?," Journal of Finance, American Finance Association, vol. 54(6), pages 2075-2107, December.
    15. Martin Cherkes & Jacob Sagi & Richard Stanton, 2009. "A Liquidity-Based Theory of Closed-End Funds," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 257-297, January.
    16. Chrétien, Stéphane & Kammoun, Manel, 2017. "Mutual Fund Performance Evaluation and Best Clienteles," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(4), pages 1577-1604, August.
    17. Ferson, Wayne E & Schadt, Rudi W, 1996. "Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, vol. 51(2), pages 425-461, June.
    18. Robert Jarrow & Philip Protter, 2019. "A rational asset pricing model for premiums and discounts on closed‐end funds: The bubble theory," Mathematical Finance, Wiley Blackwell, vol. 29(4), pages 1157-1170, October.
    19. Mariassunta Giannetti & Bige Kahraman, 2018. "Open-End Organizational Structures and Limits to Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 773-810.
    20. Robert Novy-Marx & Mihail Velikov, 2016. "A Taxonomy of Anomalies and Their Trading Costs," Review of Financial Studies, Society for Financial Studies, vol. 29(1), pages 104-147.
    21. Ferson, Wayne E, 1989. " Changes in Expected Security Returns, Risk, and the Level of Interest Rates," Journal of Finance, American Finance Association, vol. 44(5), pages 1191-1217, December.
    22. Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R. & Shachar, Or, 2013. "Why Do Closed-End Bond Funds Exist? An Additional Explanation for the Growth in Domestic Closed-End Bond Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(2), pages 405-425, April.
    23. Jonathan B. Berk & Richard Stanton, 2007. "Managerial Ability, Compensation, and the Closed‐End Fund Discount," Journal of Finance, American Finance Association, vol. 62(2), pages 529-556, April.
    24. Bekaert, Geert & Urias, Michael S, 1996. "Diversification, Integration and Emerging Market Closed-End Funds," Journal of Finance, American Finance Association, vol. 51(3), pages 835-869, July.
    25. Li, Kai & Sarkar, Asani & Wang, Zhenyu, 2003. "Diversification benefits of emerging markets subject to portfolio constraints," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 57-80, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fletcher, Jonathan, 2021. "International equity U.S. mutual funds and diversification benefits," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 246-257.
    2. Fletcher, Jonathan, 2018. "An empirical examination of the diversification benefits of U.K. international equity closed-end funds," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 23-34.
    3. Fletcher, Jonathan, 2021. "Evaluating the performance of U.S. international equity closed-end funds," Journal of Multinational Financial Management, Elsevier, vol. 60(C).
    4. Bessler, Wolfgang & Drobetz, Wolfgang & Zimmermann, Heinz, 2007. "Conditional Performance Evaluation for German Mutual Equity Funds," Working papers 2007/22, Faculty of Business and Economics - University of Basel.
    5. Wayne E. Ferson & Andrew F. Siegel, 2006. "Testing Portfolio Efficiency with Conditioning Information," NBER Working Papers 12098, National Bureau of Economic Research, Inc.
    6. Youchang Wu & Russ Wermers & Josef Zechner, 2016. "Managerial Rents vs. Shareholder Value in Delegated Portfolio Management: The Case of Closed-End Funds," Review of Financial Studies, Society for Financial Studies, vol. 29(12), pages 3428-3470.
    7. Jiang, Fuwei & Lee, Joshua & Martin, Xiumin & Zhou, Guofu, 2019. "Manager sentiment and stock returns," Journal of Financial Economics, Elsevier, vol. 132(1), pages 126-149.
    8. Fletcher, Jonathan & Basu, Devraj, 2016. "An examination of the benefits of dynamic trading strategies in U.K. closed-end funds," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 109-118.
    9. Qi Liu & Libin Tao & Weixing Wu & Jianfeng Yu, 2017. "Short- and Long-Run Business Conditions and Expected Returns," Management Science, INFORMS, vol. 63(12), pages 4137-4157, December.
    10. Stephan Kessler & Bernd Scherer, 2013. "Momentum and macroeconomic state variables," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(4), pages 335-363, December.
    11. Davide Pettenuzzo & Francesco Ravazzolo, 2016. "Optimal Portfolio Choice Under Decision‐Based Model Combinations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1312-1332, November.
    12. Michael Scholz & Jens Perch Nielsen & Stefan Sperlich, 2012. "Nonparametric prediction of stock returns guided by prior knowledge," Graz Economics Papers 2012-02, University of Graz, Department of Economics.
    13. Lin, Qi, 2018. "Technical analysis and stock return predictability: An aligned approach," Journal of Financial Markets, Elsevier, vol. 38(C), pages 103-123.
    14. Hoang, Khoa & Cannavan, Damien & Huang, Ronghong & Peng, Xiaowen, 2021. "Predicting stock returns with implied cost of capital: A partial least squares approach," Journal of Financial Markets, Elsevier, vol. 53(C).
    15. Fletcher, Jonathan, 2018. "Betas V characteristics: Do stock characteristics enhance the investment opportunity set in U.K. stock returns?," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 114-129.
    16. Yufeng Han, 2010. "On the Economic Value of Return Predictability," Annals of Economics and Finance, Society for AEF, vol. 11(1), pages 1-33, May.
    17. Dilip Patro & Louis R. Piccotti & Yangru Wu, 2017. "Exploiting Closed-End Fund Discounts: A Systematic Examination Of Alphas," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 40(2), pages 223-248, June.
    18. Puneet Handa, 2006. "Does Stock Return Predictability Imply Improved Asset Allocation and Performance? Evidence from the U.S. Stock Market (1954–2002)," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2423-2468, September.
    19. Abel, Ernest & Fletcher, Jonathan, 2004. "An empirical examination of UK emerging market unit trust performance," Emerging Markets Review, Elsevier, vol. 5(4), pages 389-408, December.
    20. Peñaranda, Francisco, 2003. "Evaluation of joint density forecasts of stock and bond returns: predictability and parameter uncertainty," LSE Research Online Documents on Economics 24857, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    Diversification benefits; Resampled portfolio efficiency™; Closed-end funds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:fmktpm:v:36:y:2022:i:3:d:10.1007_s11408-021-00397-1. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.