Diversification Strikes Again: Evidence from Global Equity Factors
33 Pages Posted: 15 Sep 2017 Last revised: 7 Nov 2017
Date Written: October 31, 2017
The benefits of country diversification are well-established. This article shows that the same benefits extend to equity factors, such as value, size, momentum, investment, and profitability. Specifically, country factor portfolios reflect both common variation, which we define as the global factor, and local variation. On average, a US investor could enjoy a 30% reduction in portfolio volatility by investing globally. We also document three other properties of equity factors. Like major asset classes, diversification benefits may not been uniform across regions, and factor portfolios of different countries tend to be more correlated during bear stock markets. However, unlike asset classes, the correlations of factor portfolios across countries have not been increasing over the last two decades, making global equity factors particularly desirable additions to a portfolio.
Keywords: Equity factors, global factors, diversification, market integration
JEL Classification: G11, G12, G15
Suggested Citation: Suggested Citation