| Convincing arguments and abundant evidence have been presented by both academics and practitioners in favor of international private investment in emerging markets. However, home bias seems to be persistent among foreign investors, and the proportion of assets invested in these markets is still small in relation to their economic potential.; This paper studies potential benefits of international diversification to emerging markets from the perspective of a developed country investor. The study develops a benchmark investing strategy within the mean-variance portfolio optimization framework. This approach allows marginal allocations to emerging markets, and recognizes the fact that most investors will hold larger proportions of domestic assets. The model attempts to link the well-documented fact of time-varying risk with portfolio selection and diversification benefits.; Results are positively in favor of international diversification even in the presence of time-varying risk and highly volatile periods. They also show that from the three developed countries studied: US, UK, and Japan, US investors would derive the greatest benefit from extending their investment strategy into emerging markets. |
