Electronic copy available at: http://ssrn.com/abstract=1302950 Electronic copy available at: http://ssrn.com/abstract=1302950 Development Strategy in offshore markets: Evidence from the Channel Islands Bruce Hearn Sir John Cass Business School, and King’s College London Abstract Purpose – This paper aims to review the development of the Channel Islands exchange and assess the potential diversification benefits arising from the inclusion of this market in investment portfolios containing UK and French equity assets Design/methodology/approach – First this paper uses a simple stochastic drift, GARCH, and time-varying parameter CAPM to model total returns indices. Second, it uses the unconditional and conditional means and variances from first stage as inputs into a mean- variance portfolio quadratic optimisation problem: the solutions of which denote the optimal asset weights. Findings – The evidence suggests that although there are serious difficulties in modelling time series from small illiquid equity markets owing to price-rigidity the limited benefits that do exist for the inclusion of Channel Islands assets in portfolios do so preferentially with Paris as opposed to London assets. Originality/value – This paper extends the literature development policy options for small offshore markets and provides the first analysis of the Channel Islands. Keywords Portfolio Choice, Asset pricing, International Financial Markets, Channel Islands Paper type Research paper JEL classification: G11, G12, G15, O55 * Corresponding author: Department of Management, King’s College London, 150 Stamford St, London SE1 9HN. Tel: 44(0)207 848 4164. Email: jenifer.piesse@kcl.ac.uk 1