The Dynamics of Geographic Versus Sectoral Diversification: Is There a Link to the Real Economy?

58 Pages Posted: 18 Aug 2004  

Francesca Carrieri

McGill University - Desautels Faculty of Management

Sergei Sarkissian

McGill University; Yerevan State University

Vihang R. Errunza

McGill University - Desautels Faculty of Management

Date Written: January 2005

Abstract

We study the dynamics of gains from sectoral versus geographic diversification and relate economic sources to changes in those gains. We estimate conditional correlations between returns on the U.S. equity market and 16 equity markets and 10 local industries from other OECD countries and find that the average correlation across countries has increased in relation to that across industries. We also show that this process is accompanied by increased alignment in the industrial structures across countries and an increase in the average conditional correlation of aggregate production growth across countries relative to that of disaggregated production growth, especially among developed economies. Thus, the increased benefits of industry-level investing across developed markets are reflected in the real side of the global economy. However, country-level investing should remain the predominant asset allocation approach in emerging markets.

Keywords: Diversification gains, asset allocation, international equity markets, industrial structure, industrial production

JEL Classification: G12, G15

Suggested Citation

Carrieri, Francesca and Sarkissian, Sergei and Errunza, Vihang R., The Dynamics of Geographic Versus Sectoral Diversification: Is There a Link to the Real Economy? (January 2005). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=458340 or http://dx.doi.org/10.2139/ssrn.458340

Francesca Carrieri

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-1582 (Phone)
514-398-3876 (Fax)

Sergei Sarkissian (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada
514-398-4876 (Phone)
514-398-3876 (Fax)

Yerevan State University

1 Alex Manoogian Street
Yerevan, 0025
Armenia

Vihang R. Errunza

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-4056 (Phone)
514-398-3876 (Fax)

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