Closed-End Country Funds and International Diversification

Using data from 1993 to 2002 for eight developed and fifteen emerging markets, we find that return correlations, mean-variance spanning, and Sharpe ratio tests support that closed-end country funds (CECF) can mimic their corresponding foreign indices, and that they are more heavily influenced by their corresponding local markets instead of the U.S. market. This implies that U.S. investors, by investing in CECF, can achieve similar international diversification benefits to those achieved by investing directly in the foreign indices. We also document increased correlation between the U.S. market and foreign markets during this period and find no compelling evidence of economically and statistically significant international diversification benefits, as opposed to a pre 1993 period. These findings could be associated with the financial market liberalization that was prevalent during the period.