Mean-Variance Convergence Around the World

49 Pages Posted: 20 Mar 2005  

Cheol S. Eun

Georgia Institute of Technology - Finance Area

Jinsoo Lee

KDI School of Public Policy and Management

Date Written: March 2005


In this paper, we document that the risk-return characteristics of 17 major stock markets of the world have converged toward each other during our sample period 1974 - 2004, consistent with the gradual integration among these markets. Specifically, we first compute the risk-return distance among international stock markets based on the Euclidean distance and show that the distance thus computed has been deceasing significantly over time, implying a mean-variance convergence. In fact, the average risk-return distance has decreased by about 40% during our study period. This international convergence in risk-return characteristics is found to be driven mostly by the declining 'country effect', rather than the rising 'industry effect'. The speed of convergence varies greatly across individual markets, in part reflecting the initial distances of individual markets from the international average risk-return characteristic. We also show that the increasing correlation among markets, a widely cited trend, and the risk-return convergence are related but distinct phenomena. Finally, we document that our sample emerging markets do not exhibit a risk-return convergence toward developed markets, reinforcing the view of emerging markets as an independent asset class.

Keywords: mean-variance convergence, risk-return distance

JEL Classification: G15, F36, F21

Suggested Citation

Eun, Cheol S. and Lee, Jinsoo, Mean-Variance Convergence Around the World (March 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: or

Cheol S. Eun (Contact Author)

Georgia Institute of Technology - Finance Area ( email )

755 Ferst Drive
Atlanta, GA 30332
United States

Jinsoo Lee

KDI School of Public Policy and Management ( email )

P.O. Box 184
Seoul, 130-868
Korea, Republic of (South Korea)
822-3299-1060 (Phone)
822-968-5072 (Fax)


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