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Time-varying integration, the euro and international diversification strategy


  • Lieven Baele
  • Koen Inghelbrecht


This paper investigates the impact of globalization and integration on the relative benefits of country and industry diversification. Unlike previous models, our factor model allows asset exposures to vary with both structural changes and temporary fluctuations in the economic and financial environment. First, we find that globalization and integration have lead to a gradual convergence of country to industry betas, especially in Europe. Second, not accounting for time-varying factor exposures leads to substantial biases in measures of country and industry risk. Third, even though the edge has structurally decreased, geographical diversification continues being superior to industry diversification.

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  • Lieven Baele & Koen Inghelbrecht, 2008. "Time-varying integration, the euro and international diversification strategy," European Economy - Economic Papers 2008 - 2015 333, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0333

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    References listed on IDEAS

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    Cited by:

    1. Devraj Basu & Roel Oomen & Alexander Stremme, 2010. "International Dynamic Asset Allocation and Return Predictability," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7-8), pages 1008-1025.
    2. Smimou, K. & Khallouli, W., 2015. "Does the Euro affect the dynamic relation between stock market liquidity and the business cycle?," Emerging Markets Review, Elsevier, vol. 25(C), pages 125-153.
    3. Philip R. Lane, 2008. "EMU and Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp272, IIIS.
    4. Wasim Ahmad & N. Bhanumurthy & Sanjay Sehgal, 2015. "Regime dependent dynamics and European stock markets: Is asset allocation really possible?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(1), pages 77-107, February.

    More about this item


    International portfolio diversification; Country versus Industry Effects; Financial integration; Idiosyncratic risk; Time-Varying Correlations; Regime-switching models; Baele; Inghelbrecht;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications


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