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Assessing the impact of short-sale constraints on the gains from international diversification

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Listed author(s):
  • Zhenyu Wang
  • Asani Sarkar
  • Kai Li

Abstract

This paper examines the impact of short-sale constraints on the magnitude of international diversification benefit for U.S. investors during the period of 1976—1998. The diversification benefit is measured as the increase in expected return when switching from the U.S. equity index portfolio to the efficient international portfolio with equal variance. Although short-sale constraints reduce the diversification benefit, we find that the reduction caused by the constraints on emerging markets is small. This result holds in both pre- and post-liberalization periods. They are also unaffected by the fact that the U.S. index portfolio is not on the efficient frontier spanned by U.S. securities.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 89.

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Date of creation: 1999
Handle: RePEc:fip:fednsr:89
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Keywords: Investments;

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