"This paper examines the impact of short-sale constraints on the magnitude of international diversification benefit for U.S. investors during the period of 1976-1998. The diversification benefit is measured as the increase in expected return when switching from the U.S. equity index portfolio to the efficient international portfolio with equal variance. Although short-sale constraints reduce the diversification benefit, we find that the reduction caused by the constraints on emerging markets is small. This result holds in both pre- and post-liberalization periods. They are also unaffected by the fact that the U.S. index portfolio is not on the efficient frontier spanned by U.S. securities"--Federal Reserve Bank of New York web site.