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Is the International Diversification Potential Diminishing? Foreign Equity Inside and Outside the US

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Author Info
Lewis, Karen K. (U of Pennsylvania)
Abstract

International capital markets have become more integrated over the past twenty years. In this paper, I ask what this integration and its resulting higher correlation would imply about international diversification potential using returns from foreign market indices and foreign stocks that are listed and traded in the US. I extend the break-date estimation approach of Bai and Perron (1998) to consider potentially changing covariances over time. I find that the covariances among country stock markets have increased only slightly while the foreign stocks in the US markets have become significantly more correlated with the US market.

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Paper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 06-6.

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Date of creation: Nov 2006
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Handle: RePEc:ecl:upafin:06-6

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C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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