Diversification Benefits of Emerging Markets Subject to Portfolio Constraints

Abstract:     
This paper examines the international diversification benefits subject to portfolio constraints --- in particular, constraints on short selling. We show that the international diversification benefits remain substantial for U.S. equity investors when they are prohibited from short selling in emerging markets. This result is robust to investment restrictions on non-native individuals. It is also unaffected by the fact that the U.S. equity index portfolio is not on the efficient frontier spanned by U.S. securities. The integration of world equity markets reduces, but does not eliminate, the diversification benefits of investing in emerging markets subject to short-sale constraints.

Number of Pages in PDF File: 24

Keywords: International diversification, short-sale constraints, home bias, asset allocation, Bayesian inference

JEL Classification: G11, G15, C11, C15

working papers series