What Drives Variation in the International Diversification Benefits? A Cross-Country Analysis

Wan-Jiun Paul Chiou and Kuntara Pukthuanthong

Chapter 13 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 519-562 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this chapter, we show that, as the world becomes increasingly integrated, the benefits of global diversification still remain positive and economically significant over time. Both regression analysis and explanatory power tests show that international integration, measured by adjusted R2 from a multifactor model, has more profound impact on the diversification benefits than correlation. Our results support Roll (2013)’s argument that R2, but not correlation, is an appropriate measure of market integration. We examine the impact of market integration determinants such as default risk, inflation, TED spread, past local equity market return, liquidity, and the relative performance of domestic portfolio on the potential diversification benefits.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
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