What Drives Variation in the International Diversification Benefits? A Cross-Country Analysis
Posted: 7 Sep 2019
Date Written: August 31, 2019
In this chapter we show that, as the world becomes increasingly integrated, the benefits of global diversification still remain positive and economically significant over time. Both regression analysis and explanatory power tests show that international integration, measured by adjusted from a multifactor model, has more profound impact on the diversification benefits than correlation. Our results support Roll (2013)’s argument that, but not correlation, is an appropriate measure of market integration. We examine the impact of market integration determinants such as default risk, inflation, TED spread, past local equity market return, liquidity, and the relative performance of domestic portfolio on the potential diversification benefits.
Keywords: Diversification Benefits, Investment Constraints, International Portfolio
JEL Classification: G11, G12, G15
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