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Is Country Diversification better than Industry Diversification?

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  • Kent Hargis
  • Jianping Mei
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    Abstract

    "In this paper, we develop a framework in which one can examine the source of industry and country diversification by examining their underlying return components. We find that the global cash flow factor explains on average 39% of the variation of country cash flows and global discount rates explain 55% of the variation of country discount rates. These are much less than the explanatory power of the two factors over industry cash flow and discount rate variations, which are 72% and 78% respectively. This suggests that global factors are much less important for return components at country level than at the industry level. As a result, both better diversification of expected returns and cash flows across countries determine the larger benefits of country diversification versus industry diversification. Moreover, emerging markets tend to have much smaller co-movements of both dividends and expected returns with those of the world, suggesting a lower degree of integration with the world goods and financial markets. Our results cast doubt on the prevailing wisdom that country diversification should be replaced by industry diversification". Copyright Blackwell Publishers Ltd, 2006.

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    Bibliographic Info

    Article provided by European Financial Management Association in its journal European Financial Management.

    Volume (Year): 12 (2006)
    Issue (Month): 3 ()
    Pages: 319-340

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    Handle: RePEc:bla:eufman:v:12:y:2006:i:3:p:319-340

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    Cited by:
    1. Gulin Vardar & Gokce Tunc & Berna Aydogan, 2012. "Long-Run and Short-Run Dynamics among the Sectoral Stock Indices: Evidence from Turkey," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(2), pages 347-357, June.
    2. Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2014. "European Equity Investing through the Financial Crisis: Can Risk Parity, Momentum or Trend Following Help to Reduce Tail Risk?," CAMA Working Papers 2014-08, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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