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A factor analysis of international portfolio diversification

Author

Listed:
  • Abbas Valadkhani
  • Surachai Chancharat
  • Charles Harvie

Abstract

Purpose - The purpose of this paper is to investigate the relationships between stock market returns of 13 countries based upon monthly data spanning December 1987 to April 2007. Design/methodology/approach - Specifically, the principal component (PC) and maximum likelihood (ML) methods are used to examine any discernable patterns of stock market co-movements. Findings - Factor analysis provides evidence that stock returns in a number of Asian countries are highly correlated and, based on the resulting robust factor loadings, they form the first well-defined common factor. The paper also finds consistent results (based on both the PC and ML methods) suggesting that the stock market returns of developed countries are also highly correlated, and constitute our second factor. Practical implications - The paper concludes that, Originality/value - Very few previous studies have investigated the benefits from portfolio diversification by using the PC and ML methods.

Suggested Citation

  • Abbas Valadkhani & Surachai Chancharat & Charles Harvie, 2008. "A factor analysis of international portfolio diversification," Studies in Economics and Finance, Emerald Group Publishing, vol. 25(3), pages 165-174, August.
  • Handle: RePEc:eme:sefpps:v:25:y:2008:i:3:p:165-174
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    Citations

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    Cited by:

    1. Tinashe Harry Dumile Kambadza & Zivanemoyo Chinzara, 2012. "Returns Correlation Structure and Volatility Spillovers Among the Major African Stock Markets," Working Papers 305, Economic Research Southern Africa.
    2. Valadkhani, Abbas & O'Brien, Martin & Karunanayake, Indika, 2009. "Modelling Australian Stock Market Volatility: A Multivariate GARCH Approach," Economics Working Papers wp09-11, School of Economics, University of Wollongong, NSW, Australia.
    3. Mohammad Z Hasan, 2017. "Transmission of International Energy Price Shocks to Australian Stock Market and its Implications for Portfolio Formation," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 7(4), pages 393-412, April.
    4. Trofimov, Ivan D., 2013. "Nonparametric Approach to Portfolio Diversification: The Case of Australian Equity Market - Un approccio non-parametrico alla diversificazione del portafoglio: il caso del mercato azionario australian," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 66(1), pages 87-112.
    5. Kasilingam Lingaraja & Murugesan Selvam & Vinayagamoorthi Vasanth & Ramachandran Rajesh Ramkumar, 2015. "Long-run Overseas Portfolio Diversification Benefits and Opportunities of Asian Emerging Stock Markets and Developed Markets," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 324-333.

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