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International portfolio diversification: Currency, industry and country effects revisited

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  • Eiling, Esther
  • Gerard, Bruno
  • Hillion, Pierre
  • de Roon, Frans A.

Abstract

We examine the relative importance of country, industry, world market and currency risk factors for international stock returns. Our approach focuses on testing the mean-variance efficiency of the various factor portfolios. An unconditional analysis does not show significant differences between country, industry and world portfolios, nor any role for currency risk factors. However, when we allow expected returns, volatilities and correlations to vary over time, we find that equity returns are mainly driven by global industry and currency risk factors. We propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets.

Suggested Citation

  • Eiling, Esther & Gerard, Bruno & Hillion, Pierre & de Roon, Frans A., 2012. "International portfolio diversification: Currency, industry and country effects revisited," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1249-1278.
  • Handle: RePEc:eee:jimfin:v:31:y:2012:i:5:p:1249-1278
    DOI: 10.1016/j.jimonfin.2012.01.015
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    More about this item

    Keywords

    International financial markets; Currency risk; Mean-variance efficiency; Conditioning information;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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