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Is Country Diversification better than Industry Diversification?

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  • Kent Hargis
  • Jianping Mei

Abstract

"In this paper, we develop a framework in which one can examine the source of industry and country diversification by examining their underlying return components. We find that the global cash flow factor explains on average 39% of the variation of country cash flows and global discount rates explain 55% of the variation of country discount rates. These are much less than the explanatory power of the two factors over industry cash flow and discount rate variations, which are 72% and 78% respectively. This suggests that global factors are much less important for return components at country level than at the industry level. As a result, both better diversification of expected returns and cash flows across countries determine the larger benefits of country diversification versus industry diversification. Moreover, emerging markets tend to have much smaller co-movements of both dividends and expected returns with those of the world, suggesting a lower degree of integration with the world goods and financial markets. Our results cast doubt on the prevailing wisdom that country diversification should be replaced by industry diversification". Copyright Blackwell Publishers Ltd, 2006.

Suggested Citation

  • Kent Hargis & Jianping Mei, 2006. "Is Country Diversification better than Industry Diversification?," European Financial Management, European Financial Management Association, vol. 12(3), pages 319-340.
  • Handle: RePEc:bla:eufman:v:12:y:2006:i:3:p:319-340
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    Cited by:

    1. Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2014. "European Equity Investing through the Financial Crisis: Can Risk Parity, Momentum or Trend Following Help to Reduce Tail Risk?," Discussion Papers 14/02, Department of Economics, University of York.
    2. Gulin Vardar & Gokce Tunc & Berna Aydogan, 2012. "Long-Run and Short-Run Dynamics among the Sectoral Stock Indices: Evidence from Turkey," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(2), pages 347-357, June.

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