Do International Diversification Benefits Continue Beyond the Portfolio Formation Period in a Small Market? Evidence for New Zealand Before and During the Asian Crisis

Abstract

This research examines whether international diversification benefits achieved in an initial portfolio formation period continue to be realised in subsequent evaluation periods and in the face of a major market disturbance. A NZ-only efficient frontier is used as a base investment from which "off-shore" unit trusts are added. Off-shore unit trusts considered are from Australia, Hong Kong, Japan and Great Britain. The analysis is conducted over a six-year period which includes the recent "Asian crisis". It is found that diversification reduced the impacts of the crisis, and that the traditional, full covariance portfolio formation model performed better than three simpler models.

Keywords: International diversification, efficient frontiers, unit trust investment, Asian crisis

JEL Classification: F36, G11, G15