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Mean-Variance Convergence around the World

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  • Eun, Cheol S.

    (Georgia Institute of Technology)

  • Lee, Jinsoo

    (Bank of Korea)

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    Abstract

    In this paper, we show (i) that the risk-return characteristics of our sample of 17 developed stock markets of the world have converged significantly toward each other during our study period 1974 - 2004, (ii) that the speed of convergence, however, varies greatly across individual markets, largely reflecting the 'initial position' of each market relative to the rest of markets in the risk-return space, and that (iii) the documented international convergence in risk-return characteristics is driven mainly by the declining 'country effect', rather than the rising 'industry effect', suggesting that the convergence is associated with international market integration. Specifically, we first compute the riskreturn distance among international stock markets based on the Euclidean distance and find that the distance thus computed has been deceasing significantly over time, implying a mean-variance convergence. In particular, the average risk-return distance has decreased by about 43% over our sample period. Lastly, we document that the risk-return characteristics of our sample of 14 emerging markets have been converging rapidly toward those of developed markets in recent years. This development notwithstanding, emerging markets still remain as a distinct asset class.

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    Bibliographic Info

    Paper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 06-1.

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    Date of creation: Feb 2006
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    Handle: RePEc:ecl:upafin:06-1

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    References

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    1. Forbes, Kristin J. & Chinn, Menzie David, 2003. "A Decomposition Of Global Linkages In Financial Markets Over Time," Santa Cruz Department of Economics, Working Paper Series qt4391b5w7, Department of Economics, UC Santa Cruz.
    2. Mittoo, Usha R, 1992. " Additional Evidence on Integration in the Canadian Stock Market," Journal of Finance, American Finance Association, vol. 47(5), pages 2035-54, December.
    3. Jorion, Philippe & Schwartz, Eduardo, 1986. " Integration vs. Segmentation in the Canadian Stock Market," Journal of Finance, American Finance Association, vol. 41(3), pages 603-14, July.
    4. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
    5. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
    6. Breitung, Jorg, 2002. "Nonparametric tests for unit roots and cointegration," Journal of Econometrics, Elsevier, vol. 108(2), pages 343-363, June.
    7. Carrieri, Francesca & Errunza, Vihang & Sarkissian, Sergei, 2006. "The Dynamics of Geographic versus Sectoral Diversification: Is There a Link to the Real Economy?," Working Papers 06-4, University of Pennsylvania, Wharton School, Weiss Center.
    8. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc.
    9. John M. Griffin & G. Andrew Karolyi, . "Another Look at the Role of the Industrial Structure of Markets for International Diversification Strategies," Research in Financial Economics 9608, Ohio State University.
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    Cited by:
    1. Geert Bekaert & Campbell R. Harvey & Christian T. Lundblad & Stephan Siegel, 2010. "What Segments Equity Markets?," National Bank of Poland Working Papers 76, National Bank of Poland, Economic Institute.
    2. Xu, Ke-Li, 2012. "Robustifying multivariate trend tests to nonstationary volatility," Journal of Econometrics, Elsevier, vol. 169(2), pages 147-154.

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