Abstract
Financial Integration and International Portfolio Diversification. This article examines the impact of financial integration on the gains expected from international diversification of portfolios. For this purpose, we develop an asymmetric extension of the GARCH multivariate model and test a conditional version of the ICAPM (International Capital Asset Pricing Model). Our results give backing to the assumption of integration of stock markets in the G-7 countries. Examination of the dynamics of gains from diversification shows that they are significant for all markets but vary considerably over time and space . In particular, we find that, except for France and the United Kingdom, these gains showed only a slight tendency to decline. A more interesting conclusion is that in recent years these gains have once more risen above their averages for the period as a whole.
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