Diversification, Integration and Emerging Market Closed-End Funds




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    • Bekaert is from Stanford University, and Urias is from Morgan Stanley & Co., Inc. We are grateful to Lewis Aaron at S.G. Warburg for generously providing data and many helpful conversations, and to the Miller Research Fund of the Graduate School of Business at Stanford University for financing the purchase of some of the data. We thank Warren Bailey, Bob Cumby, Giorgio DeSantis, Campbell Harvey, Robert Hodrick, Narayanan Jayaraman, Andrew Karolyi, Jack McDonald, Theo Nijman, Peter Reiss, Lemma Senbet, Eduardo Schwartz, Bill Sharpe, Ingrid Werner, and seminar participants at Georgetown and Duke University, the EFA Meetings in Milan, the WFA Meetings in Aspen, the Global Investment Forum at Georgia Tech, and the AFA Meetings in San Francisco for many useful suggestions and comments. The paper also greatly benefited from the thorough comments of two anonymous referees. Christoph Mueller and Albert Perez provided excellent research assistance. Bekaert acknowledges his colleagues at the NBER, the financial support of an NSF grant, and the Financial Services Research Initiative and the Bass Faculty Fellowship of the Graduate School of Business at Stanford.


We study a new class of unconditional and conditional mean-variance spanning tests that exploits the duality between Hansen-Jagannathan bounds (1991) and mean-standard deviation frontiers. The tests are shown to be equivalent to standard spanning tests in population, but we document substantial differences in the small sample performance of alternative tests. Our empirical application examines the diversification benefits from emerging equity markets using an extensive new data set on U.S. and U.K.-traded closed-end funds. We find significant diversification benefits for the U.K. country funds, but not for the U.S. funds. The difference appears to relate to differences in portfolio holdings rather than to the behavior of premiums in the United States versus the United Kingdom.