Abstract
This paper investigates the impact of various investment constraints on the benefits and asset allocation of the international optimal portfolio for domestic investors in various countries. The empirical results indicate that local investors in less-developed countries, particularly in East Asia and Latin America, benefit more from global diversification. Although the global financial market is becoming more integrated, adding constraints reduces but does not completely eliminate the diversification benefits of international investment. The addition of portfolio bounds yields the following characteristics of asset allocation: a reduction in the temporal deviation of diversification benefits, a decrease in time-variation of components in optimal portfolio, and an expansion in the range of comprising assets. Our findings are useful for asset management professionals to determine target markets to promote the sales of national/international funds and to manage risk in global portfolios.
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- 1.
The investiblity of the stock market is indicated by the degrees with which foreign investors can trade as do local investors in the domestic markets and the liquidity of assets. See Bae et al. (2004).
- 2.
For instance, the ownership of listed companies by foreigners cannot exceed the limit of 10% in Chile, 25% in South Korea, and 10% in Taiwan. In Brazil, international institutional investors cannot own more than 49% of voting share. In Switzerland, corporations are likely to issue international investors special shares that are traded at a premium over the same stocks available exclusively to Swiss nationals.
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Chiou, WJ.P., Lee, CF. (2010). International Portfolio Management: Theory and Method. In: Lee, CF., Lee, A.C., Lee, J. (eds) Handbook of Quantitative Finance and Risk Management. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-77117-5_13
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DOI: https://doi.org/10.1007/978-0-387-77117-5_13
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