Optimal and naive diversification in an emerging market: Evidence from China's A‐shares market

Yan, Cheng; Yan, Ji

doi:10.1002/ijfe.1984

Optimal and naive diversification in an emerging market: Evidence from China's A‐shares market

Yan, Cheng; Yan, Ji

Authors

Professor Karena Yan ji.yan@durham.ac.uk
Professor

Abstract

This paper empirically investigates the out‐of‐sample performance of the 1/N naive rule and the Markowitz mean–variance strategies in the largest emerging market (i.e., China's A‐shares market) and provides three new findings. First, we show that some mean–variance optimization strategies can outperform the 1/N rule in China's A‐shares market, while minimum‐variance strategies cannot. Using certainty equivalent return (CER) instead of Sharpe ratios does not change our results qualitatively. Second, we find an obvious advantage of mean–variance optimization when N is large. Third, when transaction costs are taken into account, the profitability of the unconstrained mean–variance optimizations almost vanishes, while the profitability of the mean–variance optimizations with the short‐sale constraint remains. Our results are robust to using a shorter estimation window of about 60 months. These results provide support for the use of optimal diversification strategies in emerging markets.

Citation

Yan, C., & Yan, J. (2021). Optimal and naive diversification in an emerging market: Evidence from China's A‐shares market. International Journal of Finance and Economics, 26(3), 3740-3758. https://doi.org/10.1002/ijfe.1984

Journal Article Type	Article
Acceptance Date	Jun 18, 2020
Online Publication Date	Oct 8, 2020
Publication Date	Jul 7, 2021
Deposit Date	Nov 5, 2020
Publicly Available Date	Oct 8, 2022
Journal	International Journal of Finance and Economics
Print ISSN	1076-9307
Electronic ISSN	1099-1158
Publisher	Wiley
Peer Reviewed	Peer Reviewed
Volume	26
Issue	3
Pages	3740-3758
DOI	https://doi.org/10.1002/ijfe.1984
Public URL	https://durham-repository.worktribe.com/output/1257736

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Copyright Statement
This is the peer reviewed version of the following article: Yan, Cheng & Yan, Ji (2021). Optimal and naive diversification in an emerging market: Evidence from China's A‐shares market. International Journal of Finance & Economics 26(3): 3740-3758., which has been published in final form at https://doi.org/10.1002/ijfe.1984. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.