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What explains the benefits of international portfolio diversification?

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  • Attig, Najah
  • Guedhami, Omrane
  • Nazaire, Gregory
  • Sy, Oumar

Abstract

This study uses a large sample of international stocks to examine the sources of the benefits of international portfolio diversification. It finds not only that international diversification outperformed industrial diversification over the past 27 years, but also that the gains from international diversification derive primarily from mitigating market, political, and inflation risks. Economic risk appears important for investors giving more weight to smaller countries, while financial risk appears more important to funds limited to large countries. Risks related to the quality of the legal and credit environments seem less important for international diversification.

Suggested Citation

  • Attig, Najah & Guedhami, Omrane & Nazaire, Gregory & Sy, Oumar, 2023. "What explains the benefits of international portfolio diversification?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:intfin:v:83:y:2023:i:c:s1042443122002013
    DOI: 10.1016/j.intfin.2022.101729
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    More about this item

    Keywords

    International portfolio diversification; Industrial diversification; Market risk; Political risk; Economic risk; Developed markets; Emerging markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F30 - International Economics - - International Finance - - - General
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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