Time-Varying Integration and International Diversification Strategies
53 Pages Posted: 20 Mar 2008
Date Written: March 2007
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: Suggested Citation