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International Diversification and Estimation Risk: Australian Evidence
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H.Y.Izan, B.R. Jalleh and L.L.Ong
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Abstract
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This paper examines whether the benefits to the Australian investor from international diversification documented by previous Australian studies are still present when we control for estimation risk. The performance of the Bayes-Stein international portfolio which controls directly for such risk is compared to the performance of three other international portfolios and the Australian index. The results confirm the existence of those benefits: strategies that control for estimation risk dominate those that do not. Strategies that hedge against foreign currency fluctuations are also found to significantly dominate their unhedged couterpart.
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Keywords
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INTERNATIONAL DIVERSIFICATION; ESTIMATION RISK; HEDGING.
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Contact Details
H.Y. Izan
Department of Accounting and Finance
University of Western Australia
Nedlands WA 6009
Australia
B.R. Jalleh
Department of Accounting and Finance
University of Western Australia
Nedlands WA 6009
Australia
L.L. Ong
Department of Accounting and Finance
University of Western Australia
Nedlands WA 6009
Australia
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The authors wish to thank members of the Department of Accounting and Finance at the University of Western Australia, and an anonymous referee for their comments. We are also greateful to the Macquarie bank for supplying us with data on forward exchange rates.
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