International Portfolio Diversification and Market Linkages in the Presence of Regime-Switching Volatility

Flavin, Thomas; Panopoulou, Ekaterini

doi:10.2139/ssrn.923553

International Portfolio Diversification and Market Linkages in the Presence of Regime-Switching Volatility

IIIS Working Paper No. 167

35 Pages Posted: 10 Aug 2006

See all articles by Thomas Flavin

Thomas Flavin

National University of Ireland, Maynooth (Maynooth University) - Department of Economics, Finance and Accounting

Ekaterini Panopoulou

Essex Business School

Date Written: June 2006

Abstract

We examine if the benefits of international portfolio diversification are robust to time-varying asset return volatility. Since diversified portfolios are subject to common cross-country shocks, we focus on the transmission mechanism of such shocks in the presence of regime-switching volatility. We find little evidence of increased market interdependence in turbulent periods. Furthermore, for the vast majority of time, we show that risk reduction is delivered for the US investor who holds foreign equity.

Keywords: Market comovement, International portfolio diversification, Financial market crises,regime switcing

JEL Classification: F42, G15, C32

Suggested Citation: Suggested Citation

Flavin, Thomas J and Panopoulou, Ekaterini, International Portfolio Diversification and Market Linkages in the Presence of Regime-Switching Volatility (June 2006). IIIS Working Paper No. 167, Available at SSRN: https://ssrn.com/abstract=923553 or http://dx.doi.org/10.2139/ssrn.923553