International Diversification with Large- and Small-Cap Stocks

Cheol S. Eun · Wei Huang · Sandy Lai

133 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Financial Markets and Investment Strategies Global Financial Crisis and Policies Financial Risk and Volatility Modeling

Abstract

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 comove, 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.

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References

1992The Cross-Section of Expected Stock Returns 2001Familiarity Breeds Investment 1995Is the correlation in international equity returns constant: 1960–1990?1997Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan 1991Implications of Security Market Data for Models of Dynamic Economies 1991The World Price of Covariance Risk 1970International Diversification of Investment Portfolios 1990Implications of Security Market Data for Models of Dynamic Economies

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