Time-Varying Integration and International Diversification Strategies

53 Pages Posted: 20 Mar 2008

See all articles by Lieven Baele

Lieven Baele

Tilburg University - Department of Finance

Koen Inghelbrecht

Ghent University - Department of Economics

Date Written: March 2007

Abstract

This paper investigates the impact of globalization and integration on the relative benefits of country and industry diversification. Unlike previous models, our factor model allows asset exposures to vary with both structural changes and temporary fluctuations in the economic and financial environment. First, we find that globalization and integration have lead to a gradual convergence of country to industry betas, especially in Europe. Second, not accounting for time-varying factor exposures leads to substantial biases in measures of country and industry risk. Third, even after correcting for the TMT bubble, geographical and industry diversification now yield roughly the same diversification benefits.

Keywords: International portfolio diversification, Country versus industry effects, Financial integration, Idiosyncratic risk, Time-varying correlations, Regime-switching models.

JEL Classification: G11, G12, G15, C32, F37

Suggested Citation

Baele, Lieven and Inghelbrecht, Koen, Time-Varying Integration and International Diversification Strategies (March 2007). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=852665 or http://dx.doi.org/10.2139/ssrn.852665

Lieven Baele (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 3257 (Phone)
+31 13 466 2875 (Fax)

Koen Inghelbrecht

Ghent University - Department of Economics ( email )

Sint-Pietersplein 5
Ghent, B-9000
Belgium
+32 9 264 89 77 (Phone)

HOME PAGE: http://users.ugent.be/~kjinghel/

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