Current Issues in Economics and Finance

Should U.S. Investors Hold Foreign Stocks?

March 2002Volume 8, Number 3
JEL classification: G11, G15

Authors: Asani Sarkar and Kai Li

U.S. investors have traditionally been reluctant to acquire foreign securities—in part, perhaps, because they fear that restrictions on trading in foreign markets will sharply limit any gains they might realize from diversifying their portfolios. An analysis of the effects of one type of restriction, short-sale constraints, on stock returns between 1976 and 1999 suggests that investing in emerging market stocks offers substantial benefits even when a ban on short sales is in place.

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