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The effect of the Euro on country versus industry portfolio diversification

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  • Thomas Flavin

    (National University of Ireland, Maynooth)

Abstract

We examine the relative benefits of industrial versus geographical diversification in the Euro zone before and after the introduction of the common currency. A priori, one may expect that increased stock market correlation would precipitate a move from geographical towards industrial diversification. We employ the empirical model of Heston and Rouwenhorst but show that adopting a panel data approach is a more efficient estimation method. We find evidence of a shift in factor importance; from country to industry. However, this is not exclusive to the Euro zone but is also present for non-EMU European countries. Therefore, fund managers should pursue industrial rather than geographical diversification strategies.

Suggested Citation

  • Thomas Flavin, 2004. "The effect of the Euro on country versus industry portfolio diversification," Economics Department Working Paper Series n1411004, Department of Economics, National University of Ireland - Maynooth.
  • Handle: RePEc:may:mayecw:n1411004
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    More about this item

    Keywords

    Portfolio diversification; industry and country effects; Euro;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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