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Article: International diversification with factor funds
Title | International diversification with factor funds | ||||
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Authors | |||||
Keywords | Factor funds International diversification Local factors | ||||
Issue Date | 2010 | ||||
Publisher | INFORMS. The Journal's web site is located at http://mansci.pubs.informs.org | ||||
Citation | Management Science, 2010, v. 56 n. 9, p. 1500-1518 How to Cite? | ||||
Abstract | We propose a new investment strategy employing "factor funds" to systematically enhance the meanvariance efficiency of international diversification. Our approach is motivated by the increasing evidence that size (SMB), book-to-market (HML), and momentum (MOM) factors, along with the market factor, adequately describe international stock returns, and by the direct link between investors' portfolio choice problems and international asset pricing theories and tests. Using data from 10 developed countries during the period 1981-2008, we show that the "augmented" optimal portfolio involving local factor funds substantially outperforms the "benchmark" optimal portfolio comprising country market indices only as measured by their portfolio Sharpe ratios. This strongly rejects the intersection hypothesis which posits that the local factor funds do not span investment opportunities beyond what country market indices do. Among the three classes of factor funds, HML funds contribute most to the efficiency gains. In addition, the local version of factor funds outperforms the global factor funds. The added gains from local factor diversification are significant for both in-sample and out-of-sample periods, and for a realistic range of additional investment costs for factor funds, and remain robust over time. Copyright © 2010 INFORMS. | ||||
Persistent Identifier | http://hdl.handle.net/10722/157723 | ||||
ISSN | 2023 Impact Factor: 4.6 2023 SCImago Journal Rankings: 5.438 | ||||
SSRN | |||||
ISI Accession Number ID |
Funding Information: The authors thank Stephen Brown, Bruce Grundy, Raymond M. Kan, Inmoo Lee, Paul Malatesta, Xiaoyan Zhang, summer camp participants at Singapore Management University, and seminar participants at University of Melbourne, the 2007 Financial Management Association European Conference, and the 2007 China International Conference in Finance for many helpful comments and suggestions. Tian Yun Choo and Gao Wang provided able research assistance. Sandy Lai and Zhe Zhang are grateful for the financial support from the Office for Research at Singapore Management University. The authors are solely responsible for any remaining errors. | ||||
References |
DC Field | Value | Language |
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dc.contributor.author | Eun, CS | en_HK |
dc.contributor.author | Lai, S | en_HK |
dc.contributor.author | De Roon, FA | en_HK |
dc.contributor.author | Zhang, Z | en_HK |
dc.date.accessioned | 2012-08-08T08:54:55Z | - |
dc.date.available | 2012-08-08T08:54:55Z | - |
dc.date.issued | 2010 | en_HK |
dc.identifier.citation | Management Science, 2010, v. 56 n. 9, p. 1500-1518 | en_HK |
dc.identifier.issn | 0025-1909 | en_HK |
dc.identifier.uri | http://hdl.handle.net/10722/157723 | - |
dc.description.abstract | We propose a new investment strategy employing "factor funds" to systematically enhance the meanvariance efficiency of international diversification. Our approach is motivated by the increasing evidence that size (SMB), book-to-market (HML), and momentum (MOM) factors, along with the market factor, adequately describe international stock returns, and by the direct link between investors' portfolio choice problems and international asset pricing theories and tests. Using data from 10 developed countries during the period 1981-2008, we show that the "augmented" optimal portfolio involving local factor funds substantially outperforms the "benchmark" optimal portfolio comprising country market indices only as measured by their portfolio Sharpe ratios. This strongly rejects the intersection hypothesis which posits that the local factor funds do not span investment opportunities beyond what country market indices do. Among the three classes of factor funds, HML funds contribute most to the efficiency gains. In addition, the local version of factor funds outperforms the global factor funds. The added gains from local factor diversification are significant for both in-sample and out-of-sample periods, and for a realistic range of additional investment costs for factor funds, and remain robust over time. Copyright © 2010 INFORMS. | en_HK |
dc.language | eng | en_US |
dc.publisher | INFORMS. The Journal's web site is located at http://mansci.pubs.informs.org | en_HK |
dc.relation.ispartof | Management Science | en_HK |
dc.rights | This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. | - |
dc.subject | Factor funds | en_HK |
dc.subject | International diversification | en_HK |
dc.subject | Local factors | en_HK |
dc.title | International diversification with factor funds | en_HK |
dc.type | Article | en_HK |
dc.identifier.email | Lai, S: sandy_lai@hku.hk | en_HK |
dc.identifier.authority | Lai, S=rp01620 | en_HK |
dc.description.nature | preprint | en_US |
dc.identifier.doi | 10.1287/mnsc.1100.1191 | en_HK |
dc.identifier.scopus | eid_2-s2.0-77956636116 | en_HK |
dc.relation.references | http://www.scopus.com/mlt/select.url?eid=2-s2.0-77956636116&selection=ref&src=s&origin=recordpage | en_HK |
dc.identifier.volume | 56 | en_HK |
dc.identifier.issue | 9 | en_HK |
dc.identifier.spage | 1500 | en_HK |
dc.identifier.epage | 1518 | en_HK |
dc.identifier.isi | WOS:000281715300005 | - |
dc.publisher.place | United States | en_HK |
dc.identifier.ssrn | 1623061 | - |
dc.identifier.scopusauthorid | Eun, CS=7004074630 | en_HK |
dc.identifier.scopusauthorid | Lai, S=15127185200 | en_HK |
dc.identifier.scopusauthorid | De Roon, FA=6602947534 | en_HK |
dc.identifier.scopusauthorid | Zhang, Z=8314950300 | en_HK |
dc.identifier.issnl | 0025-1909 | - |