Possibility versus feasibility: International portfolio diversification under financial liberalization

Hongbo He, Yiqing Chen, Hong Wan and Shujie Yao

International Review of Financial Analysis, 2023, vol. 87, issue C

Abstract: Financial liberalization may have double-edged impacts on international portfolio diversification since it increases financial market integration and market correlation simultaneously. Financial market integration enhances the possibility of diversifying portfolios internationally, while financial market correlation reduces the feasibility of such a diversification benefit. Using a dataset of stock market across 35 countries over the period 2001–2021, this paper examines the “possibility versus feasibility” puzzle arising from international portfolio diversification under financial liberalization. The empirical results show that financial liberalization has a positive (negative or no) impact on diversification benefits in its early (medium or developed) stage respectively due to its dual effects. Moreover, market integration positively affects diversification benefits only in the early stage of financial liberalization, while market correlation consistently has a negative impact on diversification benefits. Furthermore, this paper proposes an integration-correlation-oriented (ICO) diversification strategy to address the “possibility versus feasibility” puzzle, enabling international investors to make appropriate decisions on international portfolio diversification under financial liberalization.

Keywords: Financial liberalization; International portfolio diversification; Market integration; Market correlation; Diversification benefit (search for similar items in EconPapers)
JEL-codes: C58 F36 G11 G15 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:87:y:2023:i:c:s1057521923001680

DOI: 10.1016/j.irfa.2023.102652

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