Impact of diversification on the distribution of stock returns: International evidence

Gordon Y N TANG, Daniel F.S. Choi

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

In the past, stock returns are often assumed to be normally distributed. Potential gains from international portfolio diversification are thus based on a mean-variance framework. However, numerous empirical results reveal that stock returns are actually not normally distributed. Although previous studies found that both skewness and kurtosis can be rapidly diversified away, these results are only valid for a random sample of a given portfolio size. This paper studies the joint effect of diversification and intervaling on the skewness and kurtosis of eleven international stock market indexes with a holding period spanning from one to six months. A complete set of all possible combinations of portfolios is used. It is found that diversification does not reduce either skewness or kurtosis. As the portfolio size increases, portfolio returns become more negatively skewed and more leptokurtic. As a result, a rational investor may not gain from international diversification.

Original languageEnglish
Pages (from-to)119-127
Number of pages9
JournalJournal of Economics and Finance
Volume22
Issue number2-3
DOIs
Publication statusPublished - 1998

Scopus Subject Areas

  • Finance
  • Economics and Econometrics

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