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Another Look at the Role of the Industrial Structure of Markets for International Diversification Strategies

  • John M. Griffin
  • G. Andrew Karolyi

This paper re-examines the extent to which gains to international diversification are due to differences in industrial structure across countries. Recent papers by Roll (1992) and Heston and Rouwenhorst (1994) investigate this issue and find conflicting evidence. Using a new database, the Dow Jones World-Stock Index, with coverage in 25 countries and over 66 industry classifications, we find that while country effects dominate industry effects, the variance of industry effects comprises a substantial proportion of the total variation in international index returns. Global investors that ignore the industrial mix of the portfolios in which they invest can limit their potential diversification benefits in an economically important way.

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File URL: http://www.cob.ohio-state.edu/~fin/journal/dice/papers/1995/95-3.pdf
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Paper provided by Ohio State University in its series Research in Financial Economics with number 9608.

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Handle: RePEc:wop:ohsrfe:9608
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  1. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
  2. Clarke, Richard N, 1989. "SICs as Delineators of Economic Markets," The Journal of Business, University of Chicago Press, vol. 62(1), pages 17-31, January.
  3. Kennedy, Peter, 1986. "Interpreting Dummy Variables," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 174-75, February.
  4. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October.
  5. K.C. Chan & G. Andrew Karolyi & Rene M. Stulz, 1992. "Global Financial Markets and the Risk Premium on U.S. Equity," NBER Working Papers 4074, National Bureau of Economic Research, Inc.
  6. Bae, Kee-Hong & Andrew Karolyi, G., 1994. "Good news, bad news and international spillovers of stock return volatility between Japan and the U.S," Pacific-Basin Finance Journal, Elsevier, vol. 2(4), pages 405-438, December.
  7. Mervyn King & Enrique Sentana & Sushil Wadhwani, 1990. "Volatiltiy and Links Between National Stock Markets," NBER Working Papers 3357, National Bureau of Economic Research, Inc.
  8. Dumas, Bernard & Solnik, Bruno, 1995. " The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-79, June.
  9. G. Andrew Karolyi & Rene Stulz, . "Why do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements using ADRS," Research in Financial Economics 9501, Ohio State University.
  10. Cooper, Ian & Kaplanis, Evi, 1994. "Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 45-60.
  11. Guenther, David A. & Rosman, Andrew J., 1994. "Differences between COMPUSTAT and CRSP SIC codes and related effects on research," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 115-128, July.
  12. 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.
  13. Rene M. Stulz, 1994. "International Portfolio Choice and Asset Pricing: An Integrative Survey," NBER Working Papers 4645, National Bureau of Economic Research, Inc.
  14. Roll, Richard, 1992. " Industrial Structure and the Comparative Behavior of International Stock Market Indices," Journal of Finance, American Finance Association, vol. 47(1), pages 3-41, March.
  15. Lessard, Donald R, 1974. "World, National, and Industry Factors in Equity Returns," Journal of Finance, American Finance Association, vol. 29(2), pages 379-91, May.
  16. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
  17. Levy, Haim & Sarnat, Marshall, 1970. "International Diversification of Investment Portfolios," American Economic Review, American Economic Association, vol. 60(4), pages 668-75, September.
  18. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
  19. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
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