Time-Variation in the International Diversification Benefits

65 Pages Posted: 19 Mar 2012  

Wan-Jiun Paul Chiou

Central Michigan University - Department of Finance and Law

Kuntara Pukthuanthong

University of Missouri, Columbia

Date Written: March 15, 2012

Abstract

Does the economic value of internationally diversified portfolios shrink over time in an increasingly integrated global market? How do the dynamics of global economy and financial markets affect the benefits of international diversification? What is a proper measure of diversification benefits? In contrast to previous research, this paper specifically models the investment constraints associated with liquidity and portfolio feasibility. We find that, although the world market is more integrated, the time-varying benefits of global diversification remain positive. The addition of weighting bounds decreases a portion of diversification benefits, but this addition also decreases the uncertainty of gains and asset allocation and induces diversity in the diversified portfolio. Correlation is not associated with the potential diversification benefits but adjusted R-squared from a multifactor model is. Inflation risk, default risk premium, liquidity and size of equity market are associated with the diversification benefits.

Keywords: Diversification Benefits; Investment Constraints, International Portfolio

JEL Classification: F36, G11, G15

Suggested Citation

Chiou, Wan-Jiun Paul and Pukthuanthong, Kuntara, Time-Variation in the International Diversification Benefits (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2024336 or http://dx.doi.org/10.2139/ssrn.2024336

Wan-Jiun Paul Chiou (Contact Author)

Central Michigan University - Department of Finance and Law ( email )

Mount Pleasant, MI 48859
United States

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

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