What are the benefits of globally invested mutual funds? : evidence from statistical arbitrage models

Even though correlations between different economies' stock markets have empirically increased over time, it would have been advantageously to invest in developing countries' stock markets such as the Indian stock market, instead of investing in the US-stock market when considering the overall market returns of the last decade. Anticipating beneficial asset allocations is challenging since higher returns are basically associated with higher risks. The estimation procedure which is employed in this study to construct globally invested portfolios is based on cointegration analysis. The forecast period covers 11 years. All constructed portfolios show a strong cointegration relationship with the benchmark in the back-testing period while generating statistically significant abnormal returns between 2.44%-11.96% p.a. The Sharpe ratios are estimated to be 0.1447-0.4261 and clearly higher in comparison to the benchmark's Sharpe ratio of 0.0373 within the out-of-sample period running from 08-01-1999 - 07-31-2010. -- statistical arbitrage ; optimization procedure ; global investments ; cointegration ; portfolio optimization