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Do investors still benefit from culturally home-biased diversification? An empirical study of China, Hong Kong, and Taiwan

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  • Paul Chiou
  • Cheng-Few Lee

Abstract

Due to the continual economic integration and the accumulation of wealth in China, Hong Kong, and Taiwan, understanding portfolio strategies and the benefits of diversification for these countries is an indispensible element in managing global assets. Using weekly industry-level data, we analyze culturally home-biased diversification strategies and find that local investors still benefit from regional investments. The time-varying benefits of diversification exist even as the economies of this region have become increasingly integrated. Our analysis suggests that stricter weighting bounds reduce the economic values of diversification but enhance the feasibility of the optimal portfolio allocations. The larger benefits gained by Chinese investors suggest that international diversification is more advantageous to investors in emerging economies than to those in richer, developed markets. The robustness tests generate similar findings when we evaluate the out-of-sample effectiveness and the benefits of diversification under various parameter estimation windows. Copyright Springer Science+Business Media, LLC 2013

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  • Paul Chiou & Cheng-Few Lee, 2013. "Do investors still benefit from culturally home-biased diversification? An empirical study of China, Hong Kong, and Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 341-381, February.
    • Handle: RePEc:kap:rqfnac:v:40:y:2013:i:2:p:341-381
    DOI: 10.1007/s11156-011-0257-9
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    More about this item

    Keywords

    Pan-Chinese markets; Investment constraints; Home bias; International diversification; F37; G11; G15;
    All these keywords.

    JEL classification:

    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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