International Diversification with Large- and Small-Cap Stocks

49 Pages Posted: 27 Sep 2006  

Wei Huang

University of Hawaii at Manoa - Shidler College of Business

Cheol S. Eun

Georgia Institute of Technology - Finance Area

Sandy Lai

University of Hong Kong

Abstract

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.

Keywords: international diversification, portfolio optimization, mean variance spanning, small-cap stocks

JEL Classification: F21, F36, G11, G15

Suggested Citation

Huang, Wei and Eun, Cheol S. and Lai, Sandy, International Diversification with Large- and Small-Cap Stocks. Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=932961

Wei Huang

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States
808-956-7679 (Phone)
808-956-9887 (Fax)

Cheol S. Eun (Contact Author)

Georgia Institute of Technology - Finance Area ( email )

755 Ferst Drive
Atlanta, GA 30332
United States

Sandy Lai

University of Hong Kong ( email )

Faculty of Business and Economics
K.K. Leung Building, Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

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