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A factor analysis of international portfolio diversification

Author

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  • Abbas Valadkhani
  • Surachai Chancharat
  • Charles Harvie

Abstract

Purpose - The purpose of this paper is to investigate the relationships between stock market returns of 13 countries based upon monthly data spanning December 1987 to April 2007. Design/methodology/approach - Specifically, the principal component (PC) and maximum likelihood (ML) methods are used to examine any discernable patterns of stock market co‐movements. Findings - Factor analysis provides evidence that stock returns in a number of Asian countries are highly correlated and, based on the resulting robust factor loadings, they form the first well‐defined common factor. The paper also finds consistent results (based on both the PC and ML methods) suggesting that the stock market returns of developed countries are also highly correlated, and constitute our second factor. Practical implications - The paper concludes that,inter alia, geographical proximity and the level of economic development do matter when it comes to co‐movements of stock returns and that this has important implications for financial portfolio diversification if the aim is to reduce systematic risks across countries. Originality/value - Very few previous studies have investigated the benefits from portfolio diversification by using the PC and ML methods.

Suggested Citation

  • Abbas Valadkhani & Surachai Chancharat & Charles Harvie, 2008. "A factor analysis of international portfolio diversification," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 25(3), pages 165-174, August.
    • Handle: RePEc:eme:sefpps:v:25:y:2008:i:3:p:165-174
    DOI: 10.1108/10867370810894693
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    Citations

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    Cited by:

    1. Kasilingam Lingaraja & Murugesan Selvam & Vinayagamoorthi Vasanth & Ramachandran Rajesh Ramkumar, 2015. "Long-run Overseas Portfolio Diversification Benefits and Opportunities of Asian Emerging Stock Markets and Developed Markets," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 324-333.
    2. Trofimov, Ivan D., 2013. "Nonparametric Approach to Portfolio Diversification: The Case of Australian Equity Market - Un approccio non-parametrico alla diversificazione del portafoglio: il caso del mercato azionario australian," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 66(1), pages 87-112.
    3. Valadkhani, Abbas & O'Brien, Martin & Karunanayake, Indika, 2009. "Modelling Australian Stock Market Volatility: A Multivariate GARCH Approach," Economics Working Papers wp09-11, School of Economics, University of Wollongong, NSW, Australia.
    4. Tinashe H. D. Kambadza & Zivanemoyo Chinzara, 2012. "Returns Correlation Structure and Volatility Spillovers Among the Major African Stock Markets," Working Papers 305, Economic Research Southern Africa.
    5. Andile Khula & Ntebogang Dinah Moroke, 2017. "The Performance of Maximum Likelihood Factor Analysis on South African Stock Price Performance," Journal of Economics and Behavioral Studies, AMH International, vol. 8(6), pages 40-51.
    6. Gagari Chakrabarti, 2011. "Financial crisis and the changing nature of volatility contagion in the Asia-Pacific region," Journal of Asset Management, Palgrave Macmillan, vol. 12(3), pages 172-184, August.
    7. Mohammad Z Hasan, 2017. "Transmission of International Energy Price Shocks to Australian Stock Market and its Implications for Portfolio Formation," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 7(4), pages 393-412, April.
    8. Imtiaz Arif, Ather Iqbal, Syed Farasat Ali, Amna Sohail, 2017. "International Stock Market Diversification among BRICS-P: A Cointegration Analysis," Journal of Management Sciences, Geist Science, Iqra University, Faculty of Business Administration, vol. 4(2), pages 269-285, October.
    9. Beini Guo & Oyakhilome Ibhagui, 2019. "China–Africa stock market linkages and the global financial crisis," Journal of Asset Management, Palgrave Macmillan, vol. 20(4), pages 301-316, July.

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