Geographical Diversification Using ETFs: Multinational Evidence from COVID-19 Pandemic

29 Pages Posted: 15 Jan 2022 Last revised: 29 Jun 2022

See all articles by Hamed Yousefi

Hamed Yousefi

Drew University; Old Dominion University - Finance

Mohammad Najand

Old Dominion University - Finance

Date Written: January 13, 2022

Abstract

We examine the relations between dollar flows of U.S. listed ETFs with exposure to the U.S., Europe, Asia, and the rest of the world following an emergency like the COVID-19 crisis. Using a Markov Switching Model (MSVAR), we find evidence that investors use ETFs to gain exposure to foreign markets and swiftly adjust their portfolio's allocation in response to the change in the number of COVID-19 infected people in every location. We further extend our study to ETFs listed in the U.S., Europe, and Asia and investigate the change in foreign and domestic money flow, before and after the pandemic. We show that investors around the world rebalance their portfolios by monitoring the countries’ performance in controlling the pandemic. Our findings show that while investors in the U.S. and Asian countries direct their money to domestic funds and reduce their foreign investment following the pandemic, European investors increase foreign investment and reduce home bias. This is consistent with the flight-to-safety effect when investors shift their asset allocation away from riskier investments (here riskier locations) and into safer ones during the adverse economic shock.

Keywords: COVID-19, Pandemic, Flight to safety, Markov Switching Model, Home bias, International Diversification, ETF, Money Flow

Suggested Citation

Yousefi, Hamed and Najand, Mohammad, Geographical Diversification Using ETFs: Multinational Evidence from COVID-19 Pandemic (January 13, 2022). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4008417 or http://dx.doi.org/10.2139/ssrn.4008417

Hamed Yousefi (Contact Author)

Drew University

Madison, NJ 07940
United States

Old Dominion University - Finance ( email )

Norfolk, VA 23529-0222
United States

Mohammad Najand

Old Dominion University - Finance ( email )

School of Business and Public Administration
Norfolk, VA 23529-0222
United States
757-683-3509 (Phone)
757-683-5639 (Fax)

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