International Portfolio Diversification at Industry Level within South-East Asian Stock Markets

Abstract

The issue of financial integration, at the country level, is a well-documented phenomenon in the area of International Portfolio Diversification (IPD). Despite the increasing degree of financial integration, it is important to investigate the global integration at industry level to capture the potential benefits of IPD. Thus, this study attempts to evaluate the potential advantages of IPD for international investors when investing in emergingstock markets of South-East Asia, through examining the co-integration within these markets at industry level during 2000-2012. Using Multiple Fitness Functions Genetic Algorithm (MFFGA) and co-integration techniques, the results imply that South-East Asian emergingstock markets are not co-integrated at the industry level, and thus great diversification gains can still be achieved by cross-industry portfolio diversification in this region. However, another contribution of the study is that the findings explicitly identify the industries that are better suited for diversification purposes.