International Diversification with Large- and Small-Cap Stocks
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.
Finance and Financial Management | Portfolio and Security Analysis
Journal of Financial and Quantitative Analysis
Eun, Cheol S.; HUANG, Wei; and LAI, Sandy.
International Diversification with Large- and Small-Cap Stocks. (2008). Journal of Financial and Quantitative Analysis. 43, (2), 489-523. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2518