Does Industrial Structure Explain the Benefits of International Diversification?
Posted: 14 Dec 2004
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
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