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Assessing the impact of short-sale constraints on the gains from international diversification
This paper examines the impact of short-sale constraints on the magnitude of international diversification benefit for U.S. investors during the period of 1976?1998. The diversification benefit is measured as the increase in expected return when switching from the U.S. equity index portfolio to the efficient international portfolio with equal variance. Although short-sale constraints reduce the diversification benefit, we find that the reduction caused by the constraints on emerging markets is small. This result holds in both pre- and post-liberalization periods. They are also unaffected by ...
Should U.S. investors hold foreign stocks?
U.S. investors have traditionally been reluctant to acquire foreign securities_in part, perhaps, because they fear that restrictions on trading in foreign markets will sharply limit any gains they might realize from diversifying their portfolios. An analysis of the effects of one type of restriction, short-sale constraints, on stock returns between 1976 and 1999 suggests that investing in emerging market stocks offers substantial benefits even when a ban on short sales is in place.