Benefits Of International Portfolio 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.

The degree of Asian-European markets connectedness: examining the impact of global disorders using a spectral analysis

PurposeThis paper aims to examine potential diversification benefits between Eurozone (i.e. EURO STOXX 50) and key Asia markets: HSI (Hong Kong), KOSPI (South Korea), NIKKEI 225 (Japan) and TSEC (Taiwan). The sample covers the period from 04-01-2008 to 19-10-2023 in daily frequency.Design/methodology/approachThe empirical investigation is based on the wavelet coherence analysis, which is a localized correlation coefficient in the time and frequency domain.FindingsThe results provide evidence that long-term diversification benefits exist between EURO STOXX and NIKKEI, EURO STOXX and KOSPI (after 2015) and there are signs for the pair and EURO STOXX-TSEC (after 2014). During the short term, there are signs of diversification benefits during the sample period. However, during the medium term, the diversification benefits seem to diminish.Originality/valueThese results have crucial implications for investors regarding the benefits of international portfolio diversification.

What explains the benefits of international portfolio diversification?

This study uses a large sample of international stocks to examine the sources of the benefits of international portfolio diversification. It finds not only that international diversification outperformed industrial diversification over the past 27 years, but also that the gains from international diversification derive primarily from mitigating market, political, and inflation risks. Economic risk appears important for investors giving more weight to smaller countries, while financial risk appears more important to funds limited to large countries. Risks related to the quality of the legal and credit environments seem less important for international diversification.

COVID-19 pandemic and global financial market interlinkages: a dynamic temporal network analysis

ABSTRACT The present study investigates the changes in G20 stock market dynamics and their interlinkages in the aftermath of COVID-19. It utilizes the Detrended Cross-Correlation Analysis (DCCA) along with the network and complexity theories for detecting the contagion effect of the pandemic on the stock markets. We find that both advanced and emerging stock markets, departing from their pre-crisis structures, form a tightly coupled close community after the disease outbreak – except for China that distanced itself from the rest of the cohort. This indicates that COVID-19 has caused contagion in the global equity market, which has increased the risk to international portfolio diversification benefits. The adoption of the Network theory for contagion detection technique augments the detailed understanding of the structural changes and their interlinkages among the stock markets in a more comprehensive way.

Are Strategies for International Diversification by Country, Industry and Region Equivalent?

In this study, we examine whether international portfolio diversification still matters despite an increase in the cross-country correlations of assets returns. More specifically, we explain why an increase in global return correlations does not necessarily imply a reduction in the benefits of international portfolio diversification. We also propose to compare empirically two traditional strategies of international diversification (by country and industry) in addition to a new strategy (by region) using two different methodological approaches, namely the mean variance spanning and multivariate cointegration analysis. Over the full sample period (1994- 2008), our results suggest that the three strategies of international diversification remain effective despite the secular increase in the cross-country return correlations. When we divide the sample into two different sub-periods (1994-2000 and 2000-2008), the findings indicate that the strategy based on regional diversification proved to be a new competing strategy during the second period in comparison to the other two traditional strategies.

What Explains the Benefits of International Portfolio Diversification?

What Explains the Benefits of International Portfolio Diversification?

Dynamic return connectedness across global commodity futures markets: Evidence from time and frequency domains

This paper examines return connectedness (spillovers) among four global commodity futures markets — gold, wheat, WTI crude oil and copper on both time and frequency domains. Specifically, we first investigate the dynamics of the return spillovers to reveal the intensity and direction of transmission through 2000 to 2019. In addition, the empirical analysis shows that copper is information transmitter to other commodity futures, while the remaining three commodities are receivers of return spillovers under financial stress. Furthermore, connectedness (spillovers) between commodity returns increase sharply during the crises, diminishing the benefits of international portfolio diversification for investors. Finally, the connectedness on short-term frequency band (one to five days) contribute most to total ones, signifying that shocks get transmitted very quickly across commodity markets. Overall, our findings provide new insights into channels of information transmission with different time horizons.

Financial crises and dynamic spillovers among Chinese stock and commodity futures markets

This study examines the dynamics of return and volatility spillover across Chinese stock and four commodity futures, namely, CSI 300 index, aluminium, copper, fuel oil, and natural rubber, by employing both the multivariate DECO-GARCH model and the spillover index model. In particular, we investigate the dynamics of return and volatility spillover indices that reveal the intensity and direction of transmission during the recent financial crises, that is, the 2008–2009 global financial crisis and the 2010–2012 European debt crisis. From our empirical results, we find a positive equicorrelation level which sharply bursts during the recent financial crises. This effect can be particularly persistent during periods of turmoil, which diminishes the benefits of international portfolio diversification for investors. We also find the bi-directional return and volatility spillover indexes across Chinese stock and commodity future markets. These trends are more pronounced in the aftermath of the recent financial crises, indicating the strength of spillovers during periods of turmoil. Finally, we show evidence asserting that stock nexus commodity futures portfolio offers better but different diversification benefits and hedging effectiveness for the Chinese stock market. Overall, our findings shed new light for understanding the channels of information transmission, which can be useful in determining superior investment decisions and creating trading strategies for portfolio investors.

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.

Cross-country evidence of Islamic portfolio diversification: are there opportunities in Saudi Arabia?

PurposeOn the backdrop of growing importance of Shariah compliant equity markets, the purpose of this paper is to study cross-country portfolio diversification benefits for investors with major trading partners of Saudi Arabia, namely, USA, China, Japan, Germany and India, who have already invested or tend to invest in Saudi Arabian stock market.Design/methodology/approachThe authors have investigated time invariant, dynamic correlations at different investments horizons of the investors among Islamic asset classes by applying relevant econometric techniques like multivariate generalized autoregressive conditional heteroscedastic –DCC and continuous wavelet transforms. For robustness, this study also applied maximal overlap discrete wavelet transform.FindingsThe findings tend to indicate that the Saudi Arabian investors have portfolio diversification benefits with all major trading partners in the short-term investment horizon. Interestingly, Saudi Arabian market has the least portfolio diversification benefits with the Chinese market. However, in the long run, all markets are correlated, yielding minimum portfolio diversification benefits and most importantly Saudi Arabian investors have portfolio diversification benefits with the Indian Islamic equity market in almost all investment horizons. The findings are highly consistent across different econometric technique estimations.Research limitations/implicationsThe authors are only considering five major trading partners of Saudi Arabia. Also, the authors are using S&P and FTSE shari’ah index. Moreover, the time period of the study is constrained by the availability of shari’ah indices. Econometric limitations are also well documented in the literature.Practical implicationsThe results could be beneficial for the investors, portfolio managers, hedge fund managers and institutional investors and also could be useful for the policy makers in their policy-making decisions.Originality/valueOnly very few studies have looked into the benefits of international portfolio diversification from the perspective of local investors as well as the portfolio diversification benefits with the major trading partners of Saudi Arabia. One of the novelties of the method is to make the stock investors, practitioners and policy makers aware of the portfolio diversification benefits available at different time scales such as 4, 8, 16, 32, 64 and 256 trading days as investment holding periods to unveil the true dynamics of co-movement between those different assets.

Time to Stay Home? Global Diversification duringthe Past 25 Years

Over the past 25 years, as financial markets have become increasingly integrated, the role of foreign equities in a well-diversified portfolio has become increasingly uncertain. We present evidence that a globally diversified portfolio underperforms, on average, a U.S.-only allocation. Investors should not be overly optimistic about the potential benefits of international portfolio diversification.

Dynamic spillover effects among crude oil, precious metal, and agricultural commodity futures markets

This paper examines spillover effects among six commodity futures markets – gold, silver, West Texas Intermediate crude oil, corn, wheat, and rice – by employing the multivariate DECO-GARCH model and the spillover index. Specifically, we investigate the dynamics of return and volatility spillover indices to reveal the intensity and direction of transmission during the recent global financial and European sovereign debt crises. Our empirical results are as follows. First, we estimate a positive equicorrelation between commodity futures market returns and find that it increased sharply during the crises. This effect can persist during periods of economic and financial turmoil, diminishing the benefits of international portfolio diversification for investors. Second, we identify bidirectional return and volatility spillovers across commodity futures markets, and find more pronounced trends in their levels in the post-crisis period. This indicates the strong impact of spillovers during crisis periods. Third, both gold and silver are information transmitters to other commodity futures markets, while the remaining four commodity futures investigated were receivers of spillovers during recent periods of financial stress. Finally, we analyse the optimal portfolio weights and time-varying hedge ratios between metal and other commodities futures markets. Overall, our findings provide new insights into channels of information transmission, which may improve investment decisions and inform portfolio investors' trading strategies.

Which market integration measure?

Abstract This paper compares the dynamics of the financial integration process as described by different empirical approaches. To this end, a wide range of measures accounting for several dimensions of integration is employed. In addition, we evaluate the performance of each measure by relying on an established international finance result, i.e., increasing financial integration leads to declining international portfolio diversification benefits . Using monthly equity market data for three different country groups (i.e., developed markets, emerging markets, developed plus emerging markets) and a dynamic indicator of international portfolio diversification benefits, we find that ( i ) all measures give rise to a very similar long-run integration pattern; ( ii ) the standard correlation explains variations in diversification benefits as well or better than more sophisticated measures. These findings are robust to a battery of robustness checks.

Islamic financial markets and global crises: Contagion or decoupling?

This paper investigates the contagion effects of the global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC) on Islamic equity and bond markets. Using a sample of Islamic stock indices from various developed and emerging markets and the global Islamic stock and bond (sukuk) indices, we explore asymmetric conditional correlation dynamics across stable and crisis periods and across the two crises. The results fail to provide strong contagion evidence between conventional and Islamic equity and bond indices, supporting the decoupling hypothesis of the Islamic securities. Our findings imply that Islamic equities and bonds may provide a cushion against risk and instability, particularly in periods of turmoil. The small number of contagion cases mostly relates to the ESDC and developed Islamic stock indices. The findings also show that the Islamic emerging stock indices in the BRICS provide the most effective international portfolio diversification benefits compared to the Islamic developed indices.

Stock market comovements around the Global Financial Crisis: Evidence from the UK, BRICS and MIST markets

This paper analyses stock market co-movements around recent crises and explores the international portfolio diversification benefits available for UK investors holding a portfolio in the BRICS and MIST emerging markets. The application of conventional and regime-switch cointegration techniques suggests an absence of diversification benefits. Further evidence from application of a multivariate time-varying asymmetric model (i.e. AG-DCC) suggests that conditional correlation among the stock markets exhibits higher dependency when it is driven by negative shocks to the market. The asymmetric causality test provides supporting evidence of the decoupling hypothesis. The results indicate that the Chinese stock market is the most attractive option for the UK investor.

Which Market Integration Measure?

This paper compares the dynamics of the financial integration process as described by different empirical approaches. To this end, a wide range of measures accounting for several dimensions of integration is employed. In addition, we evaluate the performance of each measure by relying on an established international finance result, i.e., increasing financial integration leads to declining international portfolio diversification benefits. Using monthly equity market data for three different country groups (i.e., developed markets, emerging markets, developed plus emerging markets) and a dynamic indicator of international portfolio diversification benefits, we find that (i) all measures give rise to a very similar long-run integration pattern; (ii) the standard correlation explains variations in diversification benefits as well or better than more sophisticated measures. These Findings are robust to a battery of robustness checks.

(Dis)integration levels across global stock markets: A multidimensional scaling and cluster analysis

Following the globalization of the economy, interests in examining the financial linkages of economies have been increased, especially in the wake of the global financial crisis. In light of the benefits of international portfolio diversification, it is not surprising that there has been a strong interest among researchers to capture presence and extent of global stock market GSM integration. This study addresses to the feasibility and benefits of two visual data interpretation methods, based on multidimensional scaling and cluster analysis, in GSM integration context. The explanatory power of applied methods has become stronger by putting both integration and disintegration (anomaly) detection strategies. Empirically, in the first phase, we detect (dis)integration levels and clusters among 41 indexes from 40 countries. In the second phase, we choose most integrated indexes, detected in the first phase, to see whether their linkages are progressing, stable or regressing during different time series (12 seasons). In phase one and two, the topological properties of global stock networks are expressed in two-dimensional plots (dendrogram, heat map, frequency map). Based on the results, we found proposed methods capable of capturing (1) hierarchy of interrelated clusters embedded in a complex network of objects (2) different (dis)integration levels among selected global stock indexes and (3) abnormal seasons and indexes considering time and regional horizons.

Benefits of international portfolio diversification

Purpose– This paper aims to investigate opportunities of the short- and long-run international portfolio diversification (IPD) benefits by investing in the Middle Eastern oil-producing countries. Over the past decades, IPD has been the integral feature of global capital markets. Several potential benefits like increasing returns and/or reducing risk have made investors to internationalize their portfolios. Solnik’s theory (1974) approved that gains can be achieved through IPD if returns in the different markets are not perfectly correlated. This may attribute to low correlations of equity returns among different economies. In this regards, there would be a large potential of diversification benefits for investors that diversify into new emerging group of economies such as equity markets of the main oil-producing countries. These markets are often segmented and they may ensure a superior return rate for a given risk level.Design/methodology/approach– In most of the previous studies, Pearson’s correlation test is used to analyze the short-run relationship of market prices. However, recent empirical studies indicate that correlations between equity returns vary over the time. To examine the time-varying conditional correlation, this paper used the dynamic conditional correlation (DCC) model to investigate opportunities of the short-run IPD benefits. In addition, for the long-run linkage analysis, the autoregressive distributed lag (ADRL) approach introduced by Pesaranet al.(2001) is applied.Findings– It is found that, the market returns of the sampled countries are not definitely correlated in the short- and long-term. So, international portfolio investors may get the short- and long-term diversification benefits by diversifying their portfolios among the Middle Eastern equity markets, namely, Iran, Bahrain, Qatar, Kuwait, Oman, Saudi Arabia and UAE.Originality/value– This paper departs from earlier studies by focusing on the dynamic characteristics of correlation. Two main issues are pursued in this paper. First, instead of modeling the correlation by methods like Pearson correlation coefficient that consider the constant-correlation assumption, this paper directly uses the DCC model. Second, to empirically estimate the long-run relationship among stock markets in the Middle Eastern oil-producing countries, the ARDL approach is utilized. The ARDL approach is more robust and performs well for small sample sizes than other co-integration techniques.

Herding towards higher moment CAPM, contagion of herding and macroeconomic shocks: Evidence from five major developed markets

This study firstly tries to investigate the existence of herding towards market, coskewness and cokurtosis for five developed markets (i.e. France, Germany, UK, USA and China). The state space model of Hwang and Salmon (2004) has been employed. Using monthly data for all stocks that constitute these particular indexes over the 2003–2011 period, we find significant evidence of herding towards the selected risk factors. Moreover, unexpected shocks on some macroeconomic variables result in the emergence of herding. The findings also confirm cases of contagion of herding during crises periods and bad economic conditions casting doubts on the benefits of international portfolio diversification.

Stock Market Integration and Portfolio Diversifications in the ASEAN Economic Community (AEC): A Thai Perspective

This paper has two objectives. First, we examine the dynamic patterns of interdependence among six stock markets in the ASEAN Economic Community (AEC). The Dynamic Conditional Correlation (DCC) – GARCH model is used to generate time-varying cross-country correlations in stock returns. The results exhibit the time-varying behavior in both conditional variances and correlations. In addition, these cross-country conditional correlations are increasing over time in every case. Second, we investigate benefits of international portfolio diversification in ASEAN Exchange from a Thai perspective. The results show that performance of international diversify portfolios could vary over time. However, ability of the DCC-GARCH model to quickly update information on impact of market volatility could provides better information in optimization process. As a result, overall performance of portfolios using conditional correlation generated by the DCC-GARCH model is significantly better than simple portfolio with moving-average correlation. Therefore, financial liberalization process under the AEC framework provided an opportunity for a Thai investor to extract gain from international diversification.