International Asset Pricing Model and Portfolio Diversification with Time Varying Risk: A Comparison of Developed and Emerging Markets

Genevieve Nouyrigat () and Francisca Beer ()
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Genevieve Nouyrigat: CERAG - Centre d'études et de recherches appliquées à la gestion - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique

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Abstract: The objective of the article is to test if the international diversification of portfolio with emerging market and developed market has a positive effect in their performance as recommended by the modern portfolio. For this, we develop and test a partially integrated international asset pricing model using an asymmetric multivariate GARCH specification for four developed markets (the U.S., the U.K., Japan and France) and three emerging markets (Taiwan, China, and South Africa) over the period 1982-2003. As for the cross-market analysis, we show that a conditional variance is higher after shocks large for the US, China, UK and Taiwan and conditional variance is higher after negative shocks for the US, South Africa and Japan. With the equity market integration hypothesis, we suggest that domestic risk is not a priced factor for the markets of Chine, UK and US, whereas the Taiwan stock market prices both domestic and world market risks.

Keywords: International diversification of portfolio; emerging market; GARCH model. JEL Classification : F36 C32 G15; GARCH model. JEL Classification : F36; C32; G15 (search for similar items in EconPapers)
Date: 2005-02
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Published in Frontiers in finance and economics, 2005, 1 (1), pp.40-55

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