International Portfolio Diversification: Currency, Industry and Country Effects Revisited

44 Pages Posted: 31 Mar 2002 Last revised: 7 Jan 2010

See all articles by Frans de Roon

Frans de Roon

Tilburg University - Department of Finance

Esther Eiling

University of Amsterdam - Amsterdam Business School

Pierre Hillion

INSEAD - Finance

Bruno Gerard

BI Norwegian Business School - Department of Finance

Date Written: December 2009

Abstract

We examine the relative importance of country, industry, world market and currency risk factors for international stock returns. Our approach focuses on testing the mean-variance efficiency of the various factor portfolios. An unconditional analysis does not detect significant differences between country, industry and world portfolios, nor any role for currency risk factors. However, when we allow expected returns, volatilities and correlations to vary over time, we find that equity returns are mainly driven by global industry and currency risk factors. We propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets.

Keywords: International financial markets, currency risk, mean-variance efficiency, conditioning information

JEL Classification: G11, G15

Suggested Citation

de Roon, Frans A. and Eiling, Esther and Hillion, Pierre and Gerard, Bruno, International Portfolio Diversification: Currency, Industry and Country Effects Revisited (December 2009). EFA 2002 Berlin. Available at SSRN: https://ssrn.com/abstract=302353 or http://dx.doi.org/10.2139/ssrn.302353

Frans A. De Roon (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Esther Eiling

University of Amsterdam - Amsterdam Business School ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

Pierre Hillion

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
65 799 5388 (Phone)
65 799 5399 (Fax)

Bruno Gerard

BI Norwegian Business School - Department of Finance ( email )

Nydalsveien 37
Oslo, N-0484
Norway
+4746410506 (Phone)

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