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

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  • Gordon Tang
  • Daniel Choi
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. Copyright Springer 1998

Suggested Citation

  • Gordon Tang & Daniel Choi, 1998. "Impact of diversification on the distribution of stock returns: International evidence," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 22(2), pages 119-127, June.
    • Handle: RePEc:spr:jecfin:v:22:y:1998:i:2:p:119-127
    DOI: 10.1007/BF02771482
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    References listed on IDEAS

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    1. Raj Aggarwal & Ramesh P. Rao & Takato Hiraki, 1989. "Skewness And Kurtosis In Japanese Equity Returns: Empirical Evidence," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(3), pages 253-260, September.
    2. Scott, Robert C & Horvath, Philip A, 1980. "On the Direction of Preference for Moments of Higher Order Than the Variance," Journal of Finance, American Finance Association, vol. 35(4), pages 915-919, September.
    3. Lau, Hon-Shiang & Wingender, John R, 1989. "The Analytics of the Intervaling Effect on Skewness and Kurtosis of Stock Returns," The Financial Review, Eastern Finance Association, vol. 24(2), pages 215-233, May.
    4. Kane, Alex, 1982. "Skewness Preference and Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(1), pages 15-25, March.
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    5. M. D. Braga & C. R. Nava & M. G. Zoia, 2023. "Kurtosis-based risk parity: methodology and portfolio effects," Quantitative Finance, Taylor & Francis Journals, vol. 23(3), pages 453-469, March.

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