International Diversification with Large- and Small-Cap Stocks
University of Hawaii at Manoa - Shidler College of Business
Cheol S. Eun
Georgia Institute of Technology - Finance Area
University of Hong Kong
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
To the extent that investors diversify internationally, large-cap stocks receive the dominant share of fund allocation. Increasingly, however, returns to large-cap stocks or stock market indices tend to co-move, mitigating the benefits from international diversification. In contrast, stocks of locally oriented, small companies do not exhibit the same tendency. In this paper, we assess the potential of small-cap stocks as a vehicle for international portfolio diversification during the period 1980-1999. We show that the extra gains from the augmented diversification with small-cap funds are statistically significant for both in-sample and out-of-sample periods and remain robust to the consideration of market frictions.
Number of Pages in PDF File: 49
Keywords: international diversification, portfolio optimization, mean variance spanning, small-cap stocks
JEL Classification: F21, F36, G11, G15Accepted Paper Series
Date posted: September 27, 2006
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