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Time-varying Integration and International diversification strategies

Lieven Baele () and Koen Inghelbrecht

Journal of Empirical Finance, 2009, vol. 16, issue 3, 368-387

Abstract: This paper investigates the impact of globalization and integration on the relative benefits of country and industry diversification. Unlike previous models, our factor model allows asset exposures and volatilities to vary with both structural changes and temporary fluctuations in the economic and financial environment. First, we find that globalization and integration have lead to a gradual convergence of country to industry betas, especially in Europe. Second, the structurally-driven increase in market betas is accompanied by a gradual decrease in country-specific risk. Third, even though the edge has structurally decreased, geographical diversification continues being superior to industry diversification.

Keywords: International; portfolio; diversification; Country; versus; industry; effects; Financial; integration; Idiosyncratic; risk; Time-varying; correlations; Regime-switching; models (search for similar items in EconPapers)
Date: 2009
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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