International Diversification with Large- and Small-Cap Stocks

Publication Type

Journal Article

Publication Date

6-2008

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.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Financial and Quantitative Analysis

Volume

43

Issue

2

First Page

489

Last Page

523

ISSN

0022-1090

Identifier

10.1017/S0022109000003604

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