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 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.

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

524

ISSN

0022-1090

Identifier

10.1017/S0022109000003604

Publisher

Cambridge University Press

Additional URL

https://doi.org/10.1017/S0022109000003604

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