Should Us Investors Hold Foreign Stocks?
6 Pages Posted: 15 Sep 2004
Date Written: March 2002
Abstract
This paper examines the international diversification benefits when short-selling is not allowed. We show that the benefits remain substantial for US equity investors when they are prohibited from short-selling in emerging markets. This result is also true for emerging market stocks that are 'investable' for US investors. In contrast, the benefits of investing in developed countries, that are small to begin with, disappear if short-selling is not allowed. The integration of world equity markets reduces, but does not eliminate, the diversification benefits of investing in emerging markets subject to short-sale constraints.
Keywords: International diversification, Short-sale constraints, Home bias, Asset allocation
JEL Classification: G11, G15
Suggested Citation: Suggested Citation
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