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International Diversification During the Financial Crisis: A Blessing for Equity Investors?

  • Robert Vermeulen

This paper empirically investigates international equity investors' foreign portfolios before and during the financial crisis by estimating a gravity model for 22 source and 42 destination countries. The results show that international stock market diversification provides large gains during the financial crisis. This is remarkable because of large stock market correlations. During the financial crisis investors have larger positions in foreign stock markets which are relatively less correlated with the domestic market. However, this relationship is not present before the crisis. Results at the country level show that aggregate portfolio volatility is lower and returns are higher for investors from low home biased source countries during the financial crisis. This result implies that global equity diversification has an important positive effect on stabilizing a country's aggregate equity wealth, especially during periods of stock market stress.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 324.

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Date of creation: Dec 2011
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Handle: RePEc:dnb:dnbwpp:324
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