Benefits Of International Diversification Research Articles

International Portfolio Diversification Benefits: An Empirical Investigation of the 28 European Stock Markets During the Period 2014–2024

Abstract This study investigates the benefits of international diversification in the stock markets of the 28 European countries (the EU and the UK) over two five-year periods: a stable period from 2014 to 2019 and a turbulent period from 2019 to 2024. The analysis draws on the Markowitz mean-variance, Sharpe reward-to-variability, and naive diversification models, based on which different investment strategies were developed and implemented. We find that actively managed portfolios perform significantly better than naively diversified portfolios. The analyzed markets exhibit positive short-term associations, with an average correlation coefficient of 0.29 in the first period and 0.46 in the second period. However, these markets do not show long-term cointegration. Recent crises have reduced diversification benefits, yet significant opportunities for diversification remain. Diversification benefits are almost halved in the second period: average single-market standard deviation can be reduced by 60.5% with investments in 20-indices portfolios in the stable period, and only by 33.7% with the same portfolio size in the turbulent period.

A Note on the Impact of the Canada-India Diplomatic Standoff on the Performance of Canadian Mutual Funds Investments in India

On June 18, 2023, Mr. Hardeep Singh Nijjar, a Canadian citizen of Indian origin, was killed in Canada. On September 18, 2023, the Canadian Prime Minister, Mr. Justin Trudeau, accused the Indian Government of involvement in killing Mr. Nijjar in the Canadian Parliament. This accusation preceded and succeeded by other events, led to a significant diplomatic standoff that is still ongoing. We examine the impact of this event chain on the performance of daily returns of mutual funds based in Canada that are predominantly invested in Indian securities. Our results, controlled for general stock market returns, fund size, expense ratio, and interest rates, indicate that the events negatively impacted fund performance. Our study adds to the existing literature on the benefits of international diversification of mutual funds in disconnected markets. The findings of this paper suggest that political discord between two distinct and unrelated economies may impact profits and negate the advantages of international diversification. Our study is significant to professionals, particularly mutual fund managers, as it demonstrates the role of two countries’ political ties in affecting mutual fund returns.

Geoeconomic Fragmentation and International Diversification Benefits

Geoeconomic Fragmentation and International Diversification Benefits

Diversification Versus Segmentation and Integration in Financial Markets

This article examines the integration/segmentation between developed and emerging markets and its implications on the gains generated by international diversification. Both theoretical and empirical studies agree on the benefits of international diversification in terms of reducing total risk and increasing portfolio returns, showing that the gains from international diversification are superior to domestic diversification. However, the effectiveness of this strategy remains contingent on the level of market integration. Indeed, when markets are financially and economically integrated, potential gains will be low or even nonexistent. Conversely, when markets are segmented, gains will be significant. The sample for our empirical analysis consists of thirty-five financial markets: nineteen markets in Europe and Central Asia, nine markets in East Asia and the Pacific, four markets in Latin America and the Caribbean, and two markets in North America. These countries are classified according to the World Bank. The study covers the period from 01/2006 to 12/2022. Our results show that the gains from international diversification, are statistically and economically significant for all countries in the sample.

Behavioural finance perspective in theory of international portfolio investment

Behavioural theory has become a driving force for relaunching and rethinking the conceptual foundations of conventional economic theory, giving impetus to the study of behavioural economics, including behavioural finance and the theory of international portfolio investment. The theory of international portfolio investment justifies the benefits of international diversification of investment portfolios and the possibility of generating returns in different markets. However, international investment practice and empirical research show that investor behaviour is often non-rational, and investment decisions are influenced by psychology, emotions, and cognitive biases. The purpose of this paper is to compare traditional and behavioural finance and study the implications of behavioural finance in modern portfolio theory. It has been established that classical finance is based on neoclassical economics and assumes that people are rational, risk-averse, have complete information, and are focused on utility maximisation. In contrast, behavioural finance assumes that people can be rational, but in most cases, their behaviour is better explained by emotions and psychology. Investors do not always make decisions that are consistent with utility maximisation. The paper emphasizes that modern portfolio theory is based on the efficient market hypothesis, which behavioural finance rejects, as it assumes that investors' behaviour may be non-rational and influenced by psychological and behavioural factors that affect decision-making. It was revealed that today, there is no single theory of behavioural finance, but there are several theoretical concepts that describe investor behaviour from the perspective of behavioural theory. Among the most influential are the behavioural capital asset pricing model, behavioural portfolio theory, adaptive markets hypothesis, behaviourally modified asset allocation, and goal-based investing. International investment decisions and the formation of international investment portfolios are influenced by investors' behavioural biases, among which the most researched and influential are home bias, which refers to investors' preference for domestic investments, and cultural differences, which can influence risk perception and investment preferences.

Excess volatility pursuit in autoregressive GARCH model based panel data analysis at country level: BRICS context

PurposeThis particular study examined the government bond price variations in order to determine the presence of excess volatility both at country and panel group level of BRICS countries context.Design/methodology/approachThe study applied the autoregressive GARCH panel model approach proposed by Fakhry and Richter (2015) to evaluate the presence of excess volatility and then examined the diversification benefits. Further, the use of discrete wavelet transformation (DWT) has added the advantage to observe volatility across bonds along with potential diversification benefits by retaining information from the time and frequency domain perspective for both the maturities.FindingsThe main finding indicates that the excess volatility is present in BRICS countries at individual level i.e. in the case of Russia, India and China. However, the 10-year bond showing a less volatility compared to 5-year bond with the possibility of reaping out the benefits of diversification with international portfolio of sovereign bonds.Practical implicationsThe main implication of the research is related to the non-perseverance of EMH as far sovereign bonds of BRICS countries are concerned as the results indicate presence of excess volatility in the 5-year and 10-year bond markets. However, the implicit behavior of 5-year bond could benefit the active fund managers and investors by taking an advantage of a reducing systemic risk through short-medium term investments.Originality/valueThis study contributes not only to the existing studies of similar nature by examining the excess volatility in bond markets but also taking account of co-moment of distinct maturities to confirm possible international diversification benefits for BRICS countries context.

Impact of Global Residential Real Estate on Portfolio Diversification

The purpose of this paper is to examine the benefits of international diversification in residential real estate markets during various market conditions from 1999 through 2018. Most previous studies used real estate investment trusts (REITs) indexes to proxy for real estate returns, while our research is focused on residential real estate indexes provided by Dallas Federal Reserve Bank. In addition, we expand our study to 23 countries, while previous research was limited to 5 to 10 countries. We find lower correlation between US stocks and global real estate indexes. Further analysis indicates that adding international real estate to a US stock portfolio is beneficial in reducing portfolio risk, and this diversification benefit is consistent over time. Our results will assist portfolio managers and long-term investors in keeping a consistent return at a lower risk.

Optimal asset allocation strategies for international equity portfolios: A comparison of country versus industry optimization

With greater economic and financial market integration, it is critical for asset managers to choose the investment universe that provides superior diversification and performance opportunities. Therefore, it is important to investigate whether international diversification benefits arise from industry rather than country allocations. We employ various asset allocation strategies such as 1/N, Risk-Parity, Minimum-Variance as well as Mean-Variance, Bayes-Stein and Black-Litterman to analyze whether an industry-based or a country-based approach provides a superior performance. We also investigate time-varying effects for expansionary and recessionary sub-periods, equity-only and equity-bond portfolios as well as portfolios with and without short positions. For the 1986–2020 period, we find that industry-based asset allocation strategies attain higher Sharpe and Omega ratios and higher alphas compared to country-based allocations. The Sharpe ratio differences are economically relevant yet statistically insignificant in many analyzed settings. The outperformance of sector allocations are independent of the optimization approach and implemented constraints and whether bonds are included in the investment universe. This is consistent with the observation that countries have become more integrated and higher correlated than industries, resulting in lower country and relatively higher industry diversification benefits. Especially for periods with unpredictable shocks, industry allocations have superior performance. Our results have important implications for international asset allocation decisions.

ПОВЕДІНКОВІ ВІДХИЛЕННЯ ІНВЕСТИЦІЙНИХ РІШЕНЬ:НА ПРИКЛАДІ СХИЛЬНОСТІ ДО ІНВЕСТУВАННЯ НА МІСЦЕВИХ РИНКАХ

The place of home bias in the modern paradigm of international portfolio investing is determined. The differences between theory and practice of international portfolio investing resulting from such a bias are identified. Main advantages of international diversification of investment portfolios in terms of performance-risk ratio are defined. It is determined that the growing level of financial markets globalization accompanied by the increase in correlation of returns of financial assets have not affected the benefits of international diversification. The primary problems in determining the reasons for home bias are identified. The main economic and mathematical formalization of home bias in the form of indexes is distinguished. The local bias is investigated. It is revealed that local bias is not limited to national borders. It is determined that home bias is negatively correlated with the wealth of an investor. The extent of home bias for particular groups of countries according to their level of economic development is investigated. It is determined that the highest level of home bias is observed in several developed markets, including China, Japan, the USA, and France, while Luxembourg, the Netherlands, and Switzerland have the highest level of international diversification. The benefits of international diversification based on the MSCI indexes are determined. It is revealed that the benefits from international diversification through emerging markets are higher than those of developed markets. A comparative analysis of portfolios of several countries in the instruments of foreign and local markets is carried out. It is determined that the Great Recession of 2007-2008 promoted the increase in the level of home bias but since 2013 the global level of international diversification has been increasing. Approaches to the analysis of factors of presence of home bias are determined and their main advantages and disadvantages are analyzed based on comparative analysis. The impact of asymmetry of information, financial reporting standards, non-tradable sector of the economy, volumes of investment, inflation, transaction costs, institutional factors on the level of international diversification of the investment portfolio is investigated. A new approach to systematization of factors of home bias through their clustering for institutional, behavioral, transaction and other factors is suggested.

Long-term international diversification of equities

Equity investors exhibit home bias although they can reduce risk with diversified global portfolios. We studied 118 years of data for 21 developed markets to investigate international diversification benefits for long-horizon equity investors. Investing equal proportions in all the markets would have increased Sharpe ratios only for investors in countries with low domestic ratios. Optimal global portfolios would have significantly increased Sharpe ratios for investors in all the countries. Allocating equal proportions to five optimal countries would have provided most of the maximum potential benefits of international diversification. Investors in countries with lower domestic Sharpe ratios would have benefited more from international diversification, primarily through risk reduction.

The potential effect of taxes on the equity home bias in New Zealand PIEs

This paper examines the effect of taxes on the international diversification benefits available to New Zealand investors who invest in equities held through a portfolio investment entity (PIE). Historical monthly index data for 34 markets denominated in New Zealand dollars from 1993 to 2018 is used with an in-sample mean-variance optimization approach to estimate the optimal domestic asset allocation and potential benefits of international diversification. Our findings suggest that New Zealand's dividend imputation tax regime and differential taxation rates on domestic and offshore investment can account for a 7%–11% weight shift towards the New Zealand domestic market compared to the case of no taxes. Monte-Carlo simulation analysis using different return patterns also provide support for home bias in the presence of higher taxes on offshore equity investment. Overall, our results provide a partial explanation for current investor home bias in New Zealand. In contrast, without dividend imputation and differential rates, taxes would suggest a weight shift to offshore equities of between 1% and 6% due to high dividend yields in the New Zealand market.

The Ups and Downs of European Real Estate Markets’ Integration

Les marchés immobiliers nationaux sont généralement considérés comme étant segmentés les uns des autres. Les avantages de la diversification internationale se sont avérés dans le passé plus importants dans l’immobilier que dans les marchés d’actions ou d’obligations. Les nouveaux développements en Europe (marché unique, union monétaire et coordination des politiques macroprudentielles depuis la crise) devraient renforcer l’intégration et réduire ces avantages. Nous étudions le degré d’intégration variable des marchés immobiliers européens sur la période 1971-2017 en estimant le pouvoir explicatif d’un modèle linéaire multifactoriel. Nous constatons que l’intégration a été relativement stable dans le temps, avec une augmentation temporaire au cours de la crise financière de 2008. Nous notons également que les dynamiques d’intégration révèlent une évolution mondiale plutôt qu’européenne, dès lors que l’intégration des marchés nationaux européens avec les facteurs non-européens suit la même trajectoire que l’intégration intra-européenne. Nous ne détectons pas non plus de grappes d’intégration régionales stables. La diversification internationale des investissements immobiliers reste bénéfique.

Empirical evidence on international capital immobility: a consumption-based approach

ABSTRACTBased on consumption patterns and consumption-income correlation, a measure of capital mobility is proposed and used to demonstrate that capital mobility is low and that it is lower for low-income than high-income countries. While this result can be dismissed as being based on an unreliable measure of capital mobility or accepted as constituting a puzzle, it can be rationalised intuitively. While capital mobility provides benefits, it can be detrimental to the recipient country, which encourages the imposition of capital controls. Capital mobility can be impeded by home bias and failure of the benefits of international diversification to materialise.

Domestically formed international diversification

We examine whether portfolios of U.S. stocks can mimic foreign index returns thereby providing investors with the benefits of international diversification without investing directly in assets that trade abroad. We study 7 developed markets and 8 emerging markets over 1975–2013. Portfolios of U.S. stocks are constructed out-of-sample to mimic these international indices using a range of domestically available assets. We show that investors can gain considerable exposure to foreign indices using domestically traded stocks. Results indicate increases in exposure to the foreign market are strongest when emerging markets are mimicked. Our out-of-sample portfolio choice analysis shows that for most cases mimicking portfolios can be a good substitute for direct foreign investment. Hence, a possible explanation for the high proportion of domestic stocks held by investors and fund managers is that such assets are sufficient to provide much of the benefits of international diversification without directly investing abroad.

John Bogle Had It Right: The Benefits of International Diversification Are Limited

Stock index research over long-term periods supports a U-shaped relationship of the total risk to the allocation to foreign stocks (adding foreign equities lowers risk at first then increases it). This study constructs mean–variance efficient frontiers using 28 country exchange-traded funds (ETFs) available to US investors over two periods: 1996–2018 (mostly developed countries) and 2010–2018 (many emerging markets) to determine the optimal global allocation. Over both periods, the US-only ETF had the highest Sharpe ratio. For 1996–2018, the empirical mean–variance “market” portfolio of 17 country ETFs had a 94.5% allocation to the United States, and the minimum-variance portfolio had 56.55% in the United States. Over the 2010–2018 period, the empirical tangent portfolio of 28 country ETFs had a 100% allocation to the United States, and the minimum-variance threshold for efficiency was 52.65%. For both periods, global portfolios based on gross domestic product or market capitalization weights were highly inefficient. Home-country bias may not be a bias at all. Perhaps investors just rationally maximize the return-to-risk trade-off. <b>TOPICS:</b>Wealth management, exchange-traded funds and applications, global markets <b>Key Findings</b> • The empirical “market portfolio” of 28 country ETFs over 2010–2018 shows a 100% allocation to the United States. • The empirical “market portfolio” of 17 country ETFs over 1996–2018 shows a 94.5% allocation to the United States. • Strong US home country bias mean-variance dominates cap- or GDP-weighting in building global index portfolios.

The Best of Both Worlds: Accessing Emerging Economies via Developed Markets

ABSTRACTA growing body of evidence suggests that the benefits of international diversification via developed markets have declined dramatically. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of emerging countries' economic activity. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries' overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.

EXPLORING DIVERSIFICATION BENEFITS IN ASIAN EQUITY MARKETS

This paper examines the benefits of international diversification from the perspective of local investors in 15 Asian markets whose initial portfolio holdings consist of assets from the respective domestic markets. We employ the step-down approach of the mean–variance spanning test to examine the statistical significance of regional and global diversification benefits. The analysis is conducted using three portfolio groups based on relative strength ranking technique. The empirical evidence suggests greater benefits from regional diversification compared to global diversification, in most instances. For Asian economies with restrictions on international investing, these findings suggest a further liberalization of their markets.

Exchange Rate And Asean Share Price: An Analysis Of Asimmetry Response

The purpose of this study is to examine whether these markets react differently to market upturns and market downturns of markets using VAR models. This study finds that following:. First, in line with many studies on international interdependencies of equity prices,. Second, the evidence strongly suggests significant responses of the ASEAN markets to the US exchange rate downturns Third, the pattern of responses based on impulse response functions further substantiate asymmetric responses of these markets to positive and negative shocks in the US exchange rate. Practical implications, suggest that the benefits of international portfolio diversification. The originality of study is exchange rates US have an impact on ASEAN stock market integration.

A Comparative Analysis of Sector Diversification in Australia, India and China

ABSTRACT Over time, research has looked at different aspects of international diversification; such as emerging and frontier markets, use of time-varying framework and more recently at sector diversification within the emerging market and/or developed markets. The diminishing benefit from international diversification led investors to seek new diversification sources especially in the emerging markets that have low integration. The idea of sector diversification, although not directly related to international diversification, has gained renewed attention with the decline in benefits of international diversification (Gupta and Basu, 2011). Our study aims to test the benefits of sector diversification in the Asia-Pacific area using the stock indices in Australia, India, and China. The results from the study suggest that the sector diversification benefits all three markets. It also suggests that the sector diversification is not affected by political background or economic structure.

The international diversification benefits of U.S.‐traded equity products

AbstractThe benefits of international diversification for equity investors have been highlighted for decades. Despite the reduction of many previous barriers to foreign investment, investors are found to persistently overweight domestic equities. This paper examines whether the benefits of international diversification are available via U.S.‐traded equity products over a 15‐year period between 1996 and 2011. The equity products investigated are multinational corporations (MNCs), American depository receipts (ADRs), single‐country exchange‐traded funds, iShares, and closed‐end country funds. Mean‐variance spanning tests and Sharpe ratio analysis reveal that portfolios of ADRs and MNCs offer the greatest international diversification benefits to U.S. investors in a domestic setting. Whereas the benefits of international diversification vary during periods of differing market conditions, the findings for ADRs and MNCs remain robust. We conclude that it is possible to reap the benefits of international diversification via U.S.‐traded equity products but that the benefits of different equity types vary significantly.