IDEAS home Printed from https://ideas.repec.org/a/eme/rafpps/v14y2015i4p382-397.html
   My bibliography  Save this article

International diversification and return differential between the US and the foreign markets

Author

Listed:
  • Abdullah Noman

Abstract

Purpose - – This paper aims to examine the impact of the return differential between the domestic and foreign markets on the risk exposure of country mutual funds (CMFs). It is argued that when US market returns are higher than the foreign market returns, the returns chasing investors will tilt their portfolio toward the US market assets, increasing the co-movement between the US market and CMF return. Design/methodology/approach - – The sample includes 19 exchange traded funds (ETFs) and 18 closed-end mutual funds (CEFs) over the period between 2001 and 2011. A static two-factor model is used to get the benchmark results. On the other hand, a conditional specification is used, with the return differential as the information variable, to capture the variation in the exposure of the country funds to their underlying risks. Findings - – Empirically, the authors find results that partially support their argument. The results of the static two-factor model indicate that the CMFs are exposed to the foreign market risks, whereas the local (US) market risk is not generally priced. The results obtained from the conditional specification, however, shows that the estimated US betas are significant for a number of CMFs. Practical implications - – A possible interpretation of this finding is that the return differential encourages return chasing behavior of the US investors documented in the international investment literature. This, in turn, may contribute to the time-varying exposure of the CMF return to their underlying risk factors. The findings of the paper have important implications for the investors as the time variation in risk exposure of CMFs causes fluctuation in diversification benefits over time. Originality/value - – To the best of the authors’ knowledge, this is the first paper that uses return differential as the information variable in a conditional factor model.

Suggested Citation

  • Abdullah Noman, 2015. "International diversification and return differential between the US and the foreign markets," Review of Accounting and Finance, Emerald Group Publishing, vol. 14(4), pages 382-397, November.
  • Handle: RePEc:eme:rafpps:v:14:y:2015:i:4:p:382-397
    as

    Download full text from publisher

    File URL: http://www.emeraldinsight.com/10.1108/RAF-01-2015-0002?utm_campaign=RePEc&WT.mc_id=RePEc
    Download Restriction: Access to full text is restricted to subscribers

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:eee:quaeco:v:64:y:2017:i:c:p:215-227 is not listed on IDEAS

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:rafpps:v:14:y:2015:i:4:p:382-397. 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: (Virginia Chapman). General contact details of provider: http://www.emeraldinsight.com .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.