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International stock returns and market integration: A regional perspective

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  • Robin Brooks
  • Marco Del Negro

Abstract

An empirical regularity in the portfolio diversification literature is the importance of country effects in explaining international return variation. We develop a new decomposition that disaggregates these country effects into region effects and within-region country effects. We find that half the return variation typically attributed to country effects is actually due to region effects, a result robust across developed and emerging markets, with the remaining variation explained by within-region country effects. For the average investor, this means that diversifying across countries within Europe, for example, delivers half the risk reduction possible from diversifying across regions globally.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2002-20.

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Date of creation: 2003
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Handle: RePEc:fip:fedawp:2002-20
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Keywords: Financial markets ; Risk;

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  1. Bekaert, Geert & Harvey, Campbell R. & Lumsdaine, Robin L., 2002. "Dating the integration of world equity markets," Journal of Financial Economics, Elsevier, vol. 65(2), pages 203-247, August.
  2. Hali J. Edison & Michael W. Klein & Luca Antonio Ricci & Torsten Sløk, 2004. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 2.
  3. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Does Financial Liberalization Spur Growth?," Working Paper Research 53, National Bank of Belgium.
  4. John M. Griffin & G. Andrew Karolyi, . "Another Look at the Role of the Industrial Structure of Markets for International Diversification Strategies," Research in Financial Economics 9608, Ohio State University.
  5. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
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Cited by:

  1. Elena Fedorova & Mika Vaihekoski, 2009. "Global and Local Sources of Risk in Eastern European Emerging Stock Markets," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(1), pages 2-19, January.
  2. repec:udt:wpbsdt:2012-03 is not listed on IDEAS
  3. Morgado, Pedro & Tavares, José, 2007. "Economic Integration and the Co-movement of Stock Returns," CEPR Discussion Papers 6519, C.E.P.R. Discussion Papers.
  4. Wälti, Sébastien, 2011. "Stock market synchronization and monetary integration," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 96-110, February.
  5. Michael Donadelli & Marcella Lucchetta, 2013. "Emerging Stock Premia: Some Evidence From Industrial Stock Market Data," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(4), pages 398-422, April.
  6. Donadelli, Michael & Persha, Lauren, 2014. "Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty," Research in International Business and Finance, Elsevier, vol. 30(C), pages 284-309.
  7. Marcella Lucchetta & Michael Donadelli, 2012. "Emerging Stock Premia: Do Industries Matter?," Working Papers 2012_22, Department of Economics, University of Venice "Ca' Foscari".
  8. Christian Aubin & Jean-Pierre Berdot & Daniel Goyeau & Jacques Léonard, 2005. "Quelle convergence financière pour les pecos ?. Une analyse économétrique de l'évolution des marchés d'actions (1998-2003)," Revue économique, Presses de Sciences-Po, vol. 56(1), pages 147-169.
  9. Philip Lane & Sébastien Wälti, 2006. "The Euro and Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp139, IIIS.

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