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

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  • Robert Vermeulen

Abstract

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.

Suggested Citation

  • Robert Vermeulen, 2011. "International Diversification During the Financial Crisis: A Blessing for Equity Investors?," DNB Working Papers 324, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:324
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    Cited by:

    1. MacDonald, Margaux, 2017. "International capital market frictions and spillovers from quantitative easing," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 135-156.
    2. Balli, Faruk & Basher, Syed Abul & Balli, Hatice Ozer, 2013. "International income risk-sharing and the global financial crisis of 2008–2009," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2303-2313.
    3. Bijlsma, Melle & Vermeulen, Robert, 2016. "Insurance companies’ trading behaviour during the European sovereign debt crisis: Flight home or flight to quality?," Journal of Financial Stability, Elsevier, pages 137-154.
    4. Irresberger, Felix & Mühlnickel, Janina & Weiß, Gregor N.F., 2015. "Explaining bank stock performance with crisis sentiment," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 311-329.
    5. Kim, In Joon & Kim, So Jung & Yoon, Sun-Joong, 2014. "A dark side of international capital market integration: Domestic investors' view," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 238-256.
    6. Balli, Faruk & Basher, Syed Abul & Rana, Faisal, 2014. "The determinants of the volatility of returns on cross-border asset holdings," Journal of International Money and Finance, Elsevier, pages 1-23.
    7. Bijlsma, Melle & Vermeulen, Robert, 2016. "Insurance companies’ trading behaviour during the European sovereign debt crisis: Flight home or flight to quality?," Journal of Financial Stability, Elsevier, pages 137-154.
    8. Fuinhas, José Alberto & Marques, António Cardoso & Nogueira, David Coito, 2014. "Análise VAR dos índices bolsistas SP500, FTSE100, PSI20, HSI e IBOVESPA
      [Integration of the indexes SP500, FTSE100, PSI20, HSI and IBOVESPA: A VAR approach]
      ," MPRA Paper 62092, University Library of Munich, Germany, revised 10 Feb 2015.
    9. repec:eee:jimfin:v:77:y:2017:i:c:p:164-179 is not listed on IDEAS
    10. Schmitz, Martin & Hellmanzik, Christiane, 2016. "Taking gravity online: the role of virtual proximity in international finance," Working Paper Series 1879, European Central Bank.
    11. repec:bap:journl:170403 is not listed on IDEAS
    12. Lars Hornuf & Matthias Neuenkirch, 2017. "Pricing shares in equity crowdfunding," Small Business Economics, Springer, pages 795-811.
    13. Alexander, Carol & Korovilas, Dimitris & Kapraun, Julia, 2016. "Diversification with volatility products," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 213-235.
    14. Kyungkeun Kim & Dongwon Lee, 2017. "Equity Market Globalization and Portfolio Rebalancing," Working Papers 2017-17, Economic Research Institute, Bank of Korea.
    15. Lars Hornuf & Matthias Neuenkirch, 2017. "Pricing shares in equity crowdfunding," Small Business Economics, Springer, pages 795-811.

    More about this item

    Keywords

    international portfolio choice; financial integration; stock market comovement;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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