IDEAS home Printed from
   My bibliography  Save this article

Political Risk and the Benefits of International Portfolio Diversification


  • Jean-Claude Cosset

    (Université Laval)

  • Jean-Marc Suret

    (Université Laval)


This paper examines the benefits of portfolio investment in the stock markets of politically risky countries by evaluating the effects of political risk constraints on the performance of a portfolio of international stocks. We use monthly data on political risk ratings and stock returns for a sample of thirty-six countries from April 1982 to December 1991. Ex-post and ex-ante portfolio selection strategies are developed to assess the gains from international diversification. Efficient sets are derived using a quadratic programming technique. We use four ex-ante portfolio strategies whose optimal portfolio weights are those of the equally weighted portfolio, the minimum-variance portfolio the certainty-equivalence tangency portfolio and the Bayes-Stein portfolio. The empirical findings, based on the performance tests of Jobson and Korkie [1981], suggest that diversification among politically risky countries improves the risk-return characteristics of optimal portfolios. However, the most striking benefit of the inclusion of politically risk countries in an international portfolio is the reduction in overall portfolio risk.© 1995 JIBS. Journal of International Business Studies (1995) 26, 301–318

Suggested Citation

  • Jean-Claude Cosset & Jean-Marc Suret, 1995. "Political Risk and the Benefits of International Portfolio Diversification," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 26(2), pages 301-318, June.
  • Handle: RePEc:pal:jintbs:v:26:y:1995:i:2:p:301-318

    Download full text from publisher

    File URL:
    File Function: Link to full text PDF
    Download Restriction: Access to full text is restricted to subscribers.

    File URL:
    File Function: Link to full text HTML
    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.

    References listed on IDEAS

    1. Alan M Rugman & Alain Verbeke, 2003. "Extending the theory of the multinational enterprise: internalization and strategic management perspectives," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 34(2), pages 125-137, March.
    2. Buckley, Peter J & Casson, Mark, 1981. "The Optimal Timing of a Foreign Direct Investment," Economic Journal, Royal Economic Society, vol. 91(361), pages 75-87, March.
    3. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
    4. Alan M. Rugman & Alain Verbeke, 2003. "Multinational enterprises and public policy," Chapters,in: The New Economic Analysis of Multinationals, chapter 7 Edward Elgar Publishing.
    5. Alan M Rugman, 1976. "Risk Reduction by International Diversification," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 7(2), pages 75-80, June.
    6. Alan M Rugman & Alain Verbeke, 1992. "A Note on the Transnational Solution and the Transaction Cost Theory of Multinational Strategic Management," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 23(4), pages 761-771, December.
    7. Rugman, Alan & Girod, Stéphane, 2003. "Retail Multinationals and Globalization:: The Evidence is Regional," European Management Journal, Elsevier, vol. 21(1), pages 24-37, February.
    8. J H Dunning & G Norman, 1987. "The location choice of offices of international companies," Environment and Planning A, Pion Ltd, London, vol. 19(5), pages 613-631, May.
    9. Pomfret, Richard, 2001. "The Economics of Regional Trading Arrangements," OUP Catalogue, Oxford University Press, number 9780199248872.
    10. J H Dunning & G Norman, 1987. "The Location Choice of Offices of International Companies," Environment and Planning A, , vol. 19(5), pages 613-631, May.
    11. Bruce Kogut & Nalin Kulatilaka, 1994. "Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network," Management Science, INFORMS, vol. 40(1), pages 123-139, January.
    Full references (including those not matched with items on IDEAS)


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

    Cited by:

    1. repec:eee:corfin:v:44:y:2017:i:c:p:167-192 is not listed on IDEAS
    2. Oetzel, Jennifer M. & Bettis, Richard A. & Zenner, Marc, 2001. "Country risk measures: how risky are they?," Journal of World Business, Elsevier, vol. 36(2), pages 128-145, July.
    3. Jean-François L'Her & Jean-Marc Suret, 1997. "Liberalization, Political Risk and Stock Market Returns in Emerging Markets," CIRANO Working Papers 97s-15, CIRANO.
    4. Clark, Ephraim & Kassimatis, Konstantinos, 2009. "The Effect of Country Default Risk on Foreign Direct Investment," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 62(3), pages 342-361.
    5. Rezayat, Fahimeh & Yavas, Burhan F., 2006. "International portfolio diversification: A study of linkages among the U.S., European and Japanese equity markets," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 440-458, October.
    6. Radu Tunaru & Ephraim Clark, 2005. "The Evolution of International Political Risk 1956-2001," Money Macro and Finance (MMF) Research Group Conference 2005 37, Money Macro and Finance Research Group.
    7. Tsai, Ming-Chih & Su, Ying-So, 2002. "Political risk assessment on air logistics hub developments in Taiwan," Journal of Air Transport Management, Elsevier, vol. 8(6), pages 373-380.
    8. Bilson, Christopher M. & Brailsford, Timothy J. & Hooper, Vincent C., 2002. "The explanatory power of political risk in emerging markets," International Review of Financial Analysis, Elsevier, vol. 11(1), pages 1-27.
    9. Chiou, Wan-Jiun Paul, 2008. "Who benefits more from international diversification?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 466-482, December.
    10. Wan- Jiun Paul Chiou & Chun- Pin Hsu & Chin- Wen Huang, 2013. "Development and international diversification benefits of equity markets in China, Hong Kong, and Taiwan," Chapters,in: Economic Integration Across the Taiwan Strait, chapter 5, pages 102-138 Edward Elgar Publishing.
    11. Smimou, K., 2014. "International portfolio choice and political instability risk: A multi-objective approach," European Journal of Operational Research, Elsevier, vol. 234(2), pages 546-560.
    12. Doina Chichernea, 2007. "International Portfolio Investment," Journal of Information Systems & Operations Management, Romanian-American University, vol. 1(1), pages 15-20, Winter.
    13. Clark, Ephraim & Kassimatis, Konstantinos, 2004. "Country financial risk and stock market performance: the case of Latin America," Journal of Economics and Business, Elsevier, vol. 56(1), pages 21-41.
    14. Chiou, Wan-Jiun Paul & Lee, Alice C. & Chang, Chiu-Chi A., 2009. "Do investors still benefit from international diversification with investment constraints?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 448-483, May.
    15. Ho, Kwok & Milevsky, Moshe Arye & Robinson, Chris, 1999. "International equity diversification and shortfall risk," Financial Services Review, Elsevier, vol. 8(1), pages 11-25.
    16. Tirtiroglu, Dogan & Bhabra, Harjeet S. & Lel, Ugur, 2004. "Political uncertainty and asset valuation: Evidence from business relocations in Canada," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2237-2258, September.
    17. Paul Chiou & Cheng-Few Lee, 2013. "Do investors still benefit from culturally home-biased diversification? An empirical study of China, Hong Kong, and Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 341-381, February.
    18. Chiou, Wan-Jiun Paul, 2009. "Benefits of international diversification with investment constraints: An over-time perspective," Journal of Multinational Financial Management, Elsevier, vol. 19(2), pages 93-110, April.

    More about this item


    Access and download statistics


    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:pal:jintbs:v:26:y:1995:i:2:p:301-318. 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: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: .

    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.