Global Diversification with Local Stocks: A Road Less Traveled

60 Pages Posted: 14 Jul 2017  

Cheol S. Eun

Georgia Institute of Technology - Finance Area

Soohun Kim

Georgia Institute of Technology - Scheller College of Business

Fengrong Wei

Georgia Institute of Technology

Teng Zhang

Georgia Institute of Technology - Scheller College of Business

Date Written: July 8, 2017

Abstract

Utilizing approximately 51,000 sample firms from developed markets over 1995-2014, we document a stark heterogeneity in global integration at the firm-level and study its implications for diversification. Specifically, the adjusted R-square, our integration measure, is widely distributed across firms, within and across sample markets. A firm’s integration is significantly affected by its style, country, and industry attributes. Systematically identifying and holding “local stocks” that are minimally driven by the common global factors, investors can significantly benefit from diversification within developed markets. Thus, the diversification gains solely inferred from the market indices much understate the potential benefits that world markets can provide.

Keywords: Firm-level global integration; International diversification; Local stocks

JEL Classification: F36, G11, G15

Suggested Citation

Eun, Cheol S. and Kim, Soohun and Wei, Fengrong and Zhang, Teng, Global Diversification with Local Stocks: A Road Less Traveled (July 8, 2017). Available at SSRN: https://ssrn.com/abstract=2997231

Cheol S. Eun

Georgia Institute of Technology - Finance Area ( email )

755 Ferst Drive
Atlanta, GA 30332
United States

Soohun Kim

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Fengrong Wei

Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States

Teng Zhang (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

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