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Geographic versus industry diversification: Constraints matter

  • Ehling, Paul
  • Ramos, Sofia B.

This research addresses whether geographic diversification provides benefits over industry diversification in a sample of European country and industry indexes. The methodology allows performance comparisons with short-selling constraints, upper and lower bounds, and many benchmarks. In the absence of constraints, no empirical evidence is found to support the argument that country diversification is a superior approach. In the case of realistic weights on portfolios such as short-selling, and lower or upper bonds, geographic diversification performs (sig-nificantly) better. The contrary results appear to be attributable to the fact that industry portfolios are better suited to eliminate the single dominant factor risk in stock returns. Further out-of-sample analysis shows that geographic diversification performs better, although the tests do not show statistical significance.

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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 13 (2006)
Issue (Month): 4-5 (October)
Pages: 396-416

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Handle: RePEc:eee:empfin:v:13:y:2006:i:4-5:p:396-416
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