The reaction of Asian-Pacific investment company returns to U.S. equity returns

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This study is relevant to investors who wish to diversify their investment portfolio by investing in U.S.-based investment companies that invest in specific Pacific Basin countries to better understand the diversification benefits of such investments. The purpose is to examine the daily returns of selected U.S.-based, country-focused (Pacific Basin) investment companies to see if those returns accurately reflect the changes of the equity indices of the corresponding Pacific Basin market on the following trading day. The method used is that the reactions of daily investment company returns compared to U.S. market daily returns are examined for Japan, South Korea, and Australia for the period 2006–2010. These return reactions are compared to the home-country returns. Next, for the period from 2011 to 2015, the examination is broadened to include U.S.-based investment companies that invest in Taiwan, Singapore, China, and Indonesia. The results show that investment company share prices on “day t” tend to overreact to changes in the S&P 500 on “day t”, relative to “day t+1” changes in the corresponding Pacific Basin market index – often by more than 100%. Finally, the study shows that on “day t+1” these investment company share prices exhibit a reversal. These findings indicate that the diversification benefits of investing in these Pacific Basin investment companies are reduced due to this increased volatility. S&P 500 returns are accompanied by significantly larger returns on the Pacific Basin investment company shares than are actually realized in the home country on the following day, suggesting that the diversification benefits are not being fully realized.

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    • Table 1. Regression estimates for the determinants of Japanese equity investment company returns using daily returns for 2006–2010 for the days when the S&P 500 daily return was –1% or lower
    • Table 2. Regression estimates for the determinants of South Korean equity investment company returns using daily returns for 2006–2010 for the days when the S&P 500 daily return was –1% or lower
    • Table 3. Regression estimates for the determinants of Australian equity investment company returns using daily returns for 2006–2010 for the days when the S&P 500 daily return was –1% or lower
    • Table A1. 2011–2015 daily return impact of S&P 500 changes on foreign index, ETF and CEF returns
    • Table A2. Determinants of U.S. based Pacific Basin equity investment company returns – 2011–2015 (S&P 500 return ≤ –1%)
    • Conceptualization
      Earl D. Benson, Sophie X. Kong
    • Data curation
      Earl D. Benson, Sophie X. Kong
    • Formal Analysis
      Earl D. Benson, Sophie X. Kong
    • Investigation
      Earl D. Benson, Sophie X. Kong
    • Methodology
      Earl D. Benson, Sophie X. Kong
    • Project administration
      Earl D. Benson
    • Resources
      Earl D. Benson, Sophie X. Kong
    • Software
      Earl D. Benson, Sophie X. Kong
    • Supervision
      Earl D. Benson
    • Visualization
      Earl D. Benson, Sophie X. Kong
    • Writing – original draft
      Earl D. Benson
    • Writing – review & editing
      Earl D. Benson, Sophie X. Kong
    • Validation
      Sophie X. Kong