Diversification Benefit of International Equity Markets Subject to Investment Restrictions

This paper investigates the impact of constraints of short-sale and over-weight to international diversification benefits. We find that the short-sale restriction alone does not influence the diversifying benefit while the addition of over-weighting constraint significantly worsens mean-variance of optimal portfolio. This finding holds for the analyses of regional and cross-regional portfolios. The portfolio with more emerging markets exhausts more unit-risk performance than the one with developed countries when the over-weighting limitation is installed. The analysis of cross-continent portfolios suggests the portfolio with both equity markets in developing and developed countries tends to lose less mean-variance efficiency than the portfolio with only emerging markets or developed countries. The results support greater variety of geographical location and economic development among markets in portfolio will enhance the diversification benefit and decrease the loss brought by the investment constraints.