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Asian Review of Financial Research, Vol., No..
pp.1004~1029
pp.1004~1029
A Dark Side of International Diversification: Implications for Inefficient Portfolio Holders
In Joon Kim Hyundai Motors Distinguished Professor of Finance, School of Business, Yonsei University, Seoul, Korea
So Jung Kim School of Business, Yonsei University, Seoul, Korea,
Sun-Joong Yoon Assistant Professor of Finance, Dongguk Business School, Dongguk University-Seoul, Seoul, Korea
Our model explores the impact of international diversification on domestic investors¡¯ welfares, in particular, with closed-form solutions to asset holdings and utility changes in a simple equilibrium framework wherein agents have mean-variance utility. The model is able to yield the welfare losses of domestic investors by market integration when they have inefficient portfolios before integration. According to our results, only the efficient portfolio holdings of domestic investors before integration guarantee the welfare enhancement of all domestic investors. This is in contrast to the extant literature that stresses only the beneficial effect of international diversification. In addition, the model enables us to sort out the welfare changes of domestic investors into the correlation effect and the quantity-volatility effect.
In Joon Kim
So Jung Kim
Sun-Joong Yoon
Our model explores the impact of international diversification on domestic investors¡¯ welfares, in particular, with closed-form solutions to asset holdings and utility changes in a simple equilibrium framework wherein agents have mean-variance utility. The model is able to yield the welfare losses of domestic investors by market integration when they have inefficient portfolios before integration. According to our results, only the efficient portfolio holdings of domestic investors before integration guarantee the welfare enhancement of all domestic investors. This is in contrast to the extant literature that stresses only the beneficial effect of international diversification. In addition, the model enables us to sort out the welfare changes of domestic investors into the correlation effect and the quantity-volatility effect.
international diversification,welfare loss,correlation effect,quantity/volatility effect
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