Diversification in Euro Area Stock Markets: Country Versus Industry

47 Pages Posted: 29 Jul 2004

See all articles by G. A. Moerman

G. A. Moerman

AEGON Asset Management; Erasmus University Rotterdam (EUR) - Department of Financial Management

Date Written: April 2004

Abstract

The harmonisation of fiscal and economic policy within the European Monetary Union (EMU) has had a considerable impact on the economies of member countries in the past decade. In particular, several studies indicate that the proceeding economic integration among euro area countries has important consequences for the factors driving asset returns in financial markets. This study concentrates on the implications of the changing structure of security returns for asset management. Using recent euro area stock markets data, we find clear evidence that diversification over industries yields more efficient portfolios than diversification over countries. We show that this result is robust with respect to the information technology-hype and different volatility regimes. This contrasts with e.g. Rouwenhorst (1999), who finds, based on a different methodology and a different sample period, that country diversification strategies are superior. We regard this paper as a robustness check challenging the existing strand of literature and show that Rouwenhorst's (1999) conclusions seem to be outdated.

Keywords: euro area stock markets, portfolio diversification, industry factors, country factors

JEL Classification: G11, G15

Suggested Citation

Moerman, Gerard A., Diversification in Euro Area Stock Markets: Country Versus Industry (April 2004). ECB Working Paper No. 327. Available at SSRN: https://ssrn.com/abstract=526990

Gerard A. Moerman (Contact Author)

AEGON Asset Management ( email )

P.O. Box 202
2501 CE The Hague
Netherlands
+31 70 344 8318 (Phone)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

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