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Article: International diversification with factor funds

TitleInternational diversification with factor funds
Authors
KeywordsFactor funds
International diversification
Local factors
Issue Date2010
PublisherINFORMS. 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?
AbstractWe 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 Identifierhttp://hdl.handle.net/10722/157723
ISSN
2015 Impact Factor: 2.741
2015 SCImago Journal Rankings: 4.384
SSRN
ISI Accession Number ID
Funding AgencyGrant Number
Office for Research at Singapore Management University
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 FieldValueLanguage
dc.contributor.authorEun, CSen_HK
dc.contributor.authorLai, Sen_HK
dc.contributor.authorDe Roon, FAen_HK
dc.contributor.authorZhang, Zen_HK
dc.date.accessioned2012-08-08T08:54:55Z-
dc.date.available2012-08-08T08:54:55Z-
dc.date.issued2010en_HK
dc.identifier.citationManagement Science, 2010, v. 56 n. 9, p. 1500-1518en_HK
dc.identifier.issn0025-1909en_HK
dc.identifier.urihttp://hdl.handle.net/10722/157723-
dc.description.abstractWe 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.languageengen_US
dc.publisherINFORMS. The Journal's web site is located at http://mansci.pubs.informs.orgen_HK
dc.relation.ispartofManagement Scienceen_HK
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectFactor fundsen_HK
dc.subjectInternational diversificationen_HK
dc.subjectLocal factorsen_HK
dc.titleInternational diversification with factor fundsen_HK
dc.typeArticleen_HK
dc.identifier.emailLai, S: sandy_lai@hku.hken_HK
dc.identifier.authorityLai, S=rp01620en_HK
dc.description.naturepreprinten_US
dc.identifier.doi10.1287/mnsc.1100.1191en_HK
dc.identifier.scopuseid_2-s2.0-77956636116en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-77956636116&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume56en_HK
dc.identifier.issue9en_HK
dc.identifier.spage1500en_HK
dc.identifier.epage1518en_HK
dc.identifier.isiWOS:000281715300005-
dc.publisher.placeUnited Statesen_HK
dc.identifier.ssrn1623061-
dc.identifier.scopusauthoridEun, CS=7004074630en_HK
dc.identifier.scopusauthoridLai, S=15127185200en_HK
dc.identifier.scopusauthoridDe Roon, FA=6602947534en_HK
dc.identifier.scopusauthoridZhang, Z=8314950300en_HK

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