Does Industrial Structure Explain the Benefits of International Diversification?

Posted: 14 Dec 2004

See all articles by Steven L. Heston

Steven L. Heston

University of Maryland - Department of Finance

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Abstract

We examine the influence of industrial structure on the cross-sectional volatility and correlation structure of country index returns for 12 European countries between 1978 and 1992. We find that industrial structure explains very little of the cross-sectional difference in country return volatility, and that the low correlation between country indices is almost completely due to country-specific sources of return variation. Diversification accross countries within an industry is a much more effective tool for risk reduction than industry diversification within a country.

Keywords: international equity markets, portfolio diversification

JEL Classification: G15

Suggested Citation

Heston, Steven L. and Rouwenhorst, K. Geert, Does Industrial Structure Explain the Benefits of International Diversification?. Available at SSRN: https://ssrn.com/abstract=592047

Steven L. Heston (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

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