We examine whether portfolios of domestically traded securities can mimic foreign indices so that investment in assets that trade only abroad is not necessary to exhaust the gains from international diversification. We use monthly data from 1976 to 1993 for seven developed and nine emerging markets. Return correlations, mean-variance spanning, and Sharpe ratio test results provide strong evidence that gains beyond those attainable through home-made diversification have become statistically and economically insignificant. Finally, we show that the incremental gains from international diversification beyond home-made diversification portfolios have diminished over time in a way consistent with changes in investment barriers.

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Downloaded from www.iijournals.com by NEW YORK UNIVERSITY on 08/06/15.It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission. s(0) = 30, p = 0.7114, u = 1.2214, d = 0.8187, Conversion ratio = 3, Call price = 105, Risk-free yield = 10%, and Risky yield = 15%.

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