Advanced Search
MyIDEAS: Login to save this paper or follow this series

Sectoral vs. country diversification benefits and downside risk

Contents:

Author Info

  • Marina Emiris

    ()
    (National Bank of Belgium, Research Department)

Registered author(s):

    Abstract

    Recently, the advantage of country diversification relative to sector diversification has been questioned especially against the background of the European monetary and financial integration. Correct estimates of the correlation matrix are central for the evaluation of the relative diversification gains. These estimates should take into account the time-varying and asymmetric behaviour of the correlation process particularly in the context of major changes in volatility and market trends. In this paper, the ADCC (Asymmetric Dynamic Conditional Correlation) model developed by Cappiello et al. (2003) is used to estimate the conditional correlation and volatility of weekly country, sector and country/sector returns indexes over 1990-2003. This model offers a relatively flexible specification for the conditional correlation process that is still computationally feasible for estimation on larger portfolios. The estimation results point to an increase in the average correlation between country indexes during the last five years, but at the same time there is an important decline in the correlation between sector indexes. This trend is observed in both the euro area and the word-wide portfolios and is therefore not specific to the European integration process. At the same time, the volatility in the sector indexes has increased remarkably and in a relatively stronger way compared to the volatility in the country indexes. Both trends tend to cancel out in the calculations of optimal portfolio variance: lower sector correlation is offset by higher sector volatility and higher country correlation is neutralised by the relative lower volatility in country indexes. Therefore no clear trend appears from comparing the relative conditional variances of sector and country portfolios. After taking into account the effect of average returns, it turns out that country diversification is still the dominant strategy for world portfolios, whereas sector diversification is more interesting for euro area portfolios.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nbb.be/doc/oc/repec/reswpp/WP48.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bank of Belgium in its series Working Paper Research with number 48.

    as in new window
    Length: 55 pages
    Date of creation: May 2004
    Date of revision:
    Handle: RePEc:nbb:reswpp:200405-3

    Contact details of provider:
    Postal: Boulevard de Berlaimont 14, B-1000 Bruxelles
    Phone: (+ 32) (0) 2 221 25 34
    Fax: (+ 32) (0) 2 221 31 62
    Email:
    Web page: http://www.nbb.be
    More information through EDIRC

    Related research

    Keywords: portfolio diversification; correlation; international finance;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbb:reswpp:200405-3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.