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Time-varying integration, the euro and international diversification strategy

Lieven Baele () and Koen Inghelbrecht

No 333, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

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 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, not accounting for time-varying factor exposures leads to substantial biases in measures of country and industry 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; Baele; Inghelbrecht (search for similar items in EconPapers)
JEL-codes: C32 F37 G11 G12 G15 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2008-07
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