Can the Gains from International Diversification Be Achieved without Trading Abroad?


  • Vihang Errunza,

    1. McGill University, Montreal
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  • Ked Hogan,

    1. Hogan is from Barclays Global Investors, San Francisco
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  • Mao-Wei Hung

    1. National Taiwan University, Taipei
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    • Errunza is from McGill University, Montreal; Hogan is from Barclays Global Investors, San Francisco; and Hung is from National Taiwan University, Taipei. Our special thanks to René Stulz (the editor) and an anonymous referee for many insightful suggestions. We also thank Warren Bailey, Geert Bekaert, Jin-Chaun Duan, Campbell Harvey, Andrew Karolyi, Ken Kroner, Usha Mittoo, and Michael Rebello, Marcia Roitberg, and Jahangir Sultan for helpful comments. Research assistance from Carlton Osakwe and Yuxing Yan is gratefully acknowledged. The authors thank the Social Sciences and Humanities Research Council of Canada and the Faculty of Management at McGill University for financial support. We are grateful to the capital markets department of the International Finance Corporation for providing the data on emerging markets.


We examine whether portfolios of domestically traded securities can mimic foreign indices so that investment in assets that trade only abroad is not necessary to exhaust the gains from international diversification. We use monthly data from 1976 to 1993 for seven developed and nine emerging markets. Return correlations, mean-variance spanning, and Sharpe ratio test results provide strong evidence that gains beyond those attainable through home-made diversification have become statistically and economically insignificant. Finally, we show that the incremental gains from international diversification beyond home-made diversification portfolios have diminished over time in a way consistent with changes in investment barriers.