Benefits Of Global Diversification Research Articles

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.

Computing stock price comovements with a three-regime panel smooth transition error correction model

This paper studies the hypothesis of stock price comovements toward the US market for a large sample of developed and emerging stock markets (G6, BRICS, and MENA) over the periods of February 1970–June 2012, January 1995–June 2012, and June 2005–June 2012. To consider cross-market heterogeneity and asymmetrical time-variation in stock market integration, we propose an innovative threshold panel cointegration specification based on a panel smooth transitions error correction model. This specification enables us to identify different integration regimes that transit smoothly, which further reproduces the effects of market frictions and behavioral heterogeneity among the markets under consideration. Accordingly, we distinguish between efficient and inefficient market states. Further, we show that, while MENA and BRICS are segmented with the US market, a nonlinear mean-reversion of stock prices is observed for the G6 markets, suggesting evidence of heterogeneous threshold market integration. This suggests global diversification benefits from a US-MENA portfolio, while only per-regime investment opportunities appear for US-G6 and US-BRICS portfolios.

THE FIRST INTERNATIONAL MERGER WAVE: DOES ACQUIRING FIRM WEALTH EFFECT PERSIST?

ABSTRACT The immediate acquiring firm announcement wealth effect throughout the first international takeover wave have been unprecedented and encouraging. However, little attention has been paid to their shareholder values in the long run. It is not unreasonable to suspect that the prospect in the long haul might not be as promising in light of the evidence presented in most long-term post-merger domestic M&A research as well as the claim of global diversification discount in a number of the international M&A studies. The results shown in the present research have been consistent with the cross-border diversification discount in the long run regardless of the measuring models implemented. The somewhat more surprising aspect is the sheer volumes of the discounts due to an apparent mismatch between the investors' initial over optimism and the acquirers' seeming inability of substantiating their perceived global diversification benefits. Furthermore, the conventional International Business OLI paradigm appears to explain the immediate acquiring firm wealth effect reasonably well, albeit providing less than full explanation on the diversification discount in the short and relatively long haul. In general, the global diversification discount starts to show up within three months of the initial cross-border M&A announcements, or six months if measured by a modified methodology. That is, the unprecedented acquiring firm value gain during the first international merger wave does not last long. To escape from such long-term global diversification discount and avoid the winners' curse, it would not be ill-advised for the acquirers to efficiently implement their post-announcement cross-border acquisition strategies in order to keep investors' adverse sentiment in check, and the OLI framework seems to provide a blueprint in principle for their success. Keywords Globalization; Mergers and Acquisitions; M&A; Announcement Wealth Effect; Global Diversification; Cross-Border Diversification; Diversification Discount; International Merger Wave

Global Diversification Benefits: Empirical Evidence from Frontier Emerging Markets

We document the case of global diversification benefits, that can be achieved by the new emerging markets in the world. The so-called frontier emerging markets, along with 4 emerging markets namely Brazil, Russia, India and China and 3 developed markets USA, UK and Japan. We are the first to use a common subset of frontier emerging markets from three distinct index providers, MSCI, S&P and Russell, and thereby covering more than 80% of the respective index constituents.This study explores the dynamic relationship between the degree of financial market integration for developed and emerging markets with that of frontier markets. We use daily stock index data for the given markets, and use different statistical methods for modeling linear and non-linear serial dependence using GARCH, GJR-GRACH, E-GARCH and DCC models. Further our results highlight the presence of significant time-varying conditional correlations between these markets. During crisis periods or turbulence dynamic correlation falls, for frontier markets compared to emerging markets. Our results indicate that investors who expand their investment opportunity set by gaining exposure to frontier markets can significantly improve the efficiency of their investment portfolio on a risk-return metric, even after controlling for transaction costs.

Can advanced markets help diversify risks in frontier stock markets? Evidence from Gulf Arab stock markets

This study examines global diversification benefits from the perspective of local investors in the frontier markets in the Gulf Cooperation Council using two diversification measures: the correlation index and return dispersion. The findings suggest a strong link between market volatility and both diversification measures in all markets, with the exception of Bahrain, indicating that investors in these frontier markets will face significant challenges achieving desired levels of diversification using domestic stocks only. However, I also find that significant amount of market risk in these countries can be eliminated by supplementing domestic portfolios with positions in advanced markets. Finally, I show that risk minimization strategies using foreign traded assets also lead to favorable risk adjusted returns for investors in these markets, stressing the potential benefits of financial liberalization in developing markets.

Time-Variation in the International Diversification Benefits

Does the economic value of internationally diversified portfolios shrink over time in an increasingly integrated global market? How do the dynamics of global economy and financial markets affect the benefits of international diversification? What is a proper measure of diversification benefits? In contrast to previous research, this paper specifically models the investment constraints associated with liquidity and portfolio feasibility. We find that, although the world market is more integrated, the time-varying benefits of global diversification remain positive. The addition of weighting bounds decreases a portion of diversification benefits, but this addition also decreases the uncertainty of gains and asset allocation and induces diversity in the diversified portfolio. Correlation is not associated with the potential diversification benefits but adjusted R-squared from a multifactor model is. Inflation risk, default risk premium, liquidity and size of equity market are associated with the diversification benefits.

International Portfolio Diversification Benefits: Cross-Country Evidence from a Local Perspective

We investigate how the benefits of international portfolio diversification differ across countries from the perspective of a local investor. We find that the benefits of investing abroad are largest for investors in developing countries, including when controlling for currency effects. Most of the benefits are obtained from investing outside the region of the home country. These global diversification benefits remain large when controlling for short-sales constraints in developing stock markets. The gains from international portfolio diversification appear to be largest for countries with high country risk. In addition to this cross-sectional evidence, we also provide evidence that diversification benefits vary over time as country risk changes. We find that diversification benefits have decreased for most countries in our sample over the past two decades.

Portfolios Resampling and International Diversification: A Non-Parametric Stochastic Dominance Approach

The aim of this paper is to consider instability and ambiguity problems on portfolio selection. We examine the impact of estimation errors on financial portfolios optimization processes. We investigate the controversy problem of international and domestic optimal diversification strategies choices using a non parametric stochastic dominance approach (NPSDA) based on Monte Carlo (MC) and Bootstrap p-values from an American point of view. Based on a data set consisting of daily closing prices of U.S. stocks and index and Asian and Latin American stock market indices for the period from August 03, 1993 to August 31, 2007, estimation errors visualisation results show that small changes in input parameters imply large changes in the optimized portfolio composition and a considerably modification of mean-variance efficient frontiers shape. Though mean-variance optimization could not be used to draw any preference between international and domestic diversification, empirical findings reveal the utility of the SD approach to define an optimal strategy. Further, results show that there exists substantial evidence of international global diversification benefits for domestic investors. More precisely, for risk levels higher than 30 percent, risk-adverse American investor having an increasing utility function prefers global international to domestic resampled diversification strategy. Besides, we find that domestic resampled diversification strategy beats all international major and emerging markets diversification strategies. For risk levels lower than 30 percent and 23.98, respectively, U.S. investor having a high risk-aversion coefficient prefers domestic to international major and emerging markets diversification and invests 77 percent and 82 percent, respectively, of his wealth’ locally. SD analysis suggests that global international diversification dominates entirely major and emerging markets diversification strategies for a U.S. risk-adverse investor having an increasing utility function. Finally, the findings of the SD tests reveal that risk-adverse U.S. investor having an increasing utility function prefers to diversify 45 percent of his wealth in major markets rather than in emerging markets.

Valuation effects of global diversification

This paper examines the effect of global diversification on firm value using a data set of US firms from 1994 to 2002. We document that global diversification enhances firm value. Specifically, we find that Tobin's q, our proxy for firm value, increases with foreign sales (measured as a fraction of the firm's total sales), even after we control for well-known determinants of firm value. In contrast, we find no such evidence for industrial diversification. We find evidence of both financial and real effects driving such a value enhancement from global diversification. Furthermore, we find that the valuation benefits from global diversification are higher if the firm diversifies into countries with creditor rights that are stronger than those of the United States. Our results are also robust to controlling for the firm's endogenous choice to diversify across countries or across industries. Our study is anchored by the theories of both the financial and real dimensions of global diversification, and our results support both theories. Overall, our results provide a unifying view that global diversification benefits are driven by both the real and financial dimensions.

Global Property Market Diversification

This paper examines global diversification benefits provided by developed property markets over 1992–2007. We employ a cointegration methodology, invariant to pair-wise correlational instability plaguing MPT approaches, to investigate regional and country property market diversification benefits for U.S. domiciled global real estate investors. We show, theoretically and empirically, the cointegration procedure aptly identifies markets integrated by common trends that mitigate diversification potential. We show global property markets are interregionally independent but find intraregional market cointegration. A portfolio of markets independent of cointegrating relationships performs best during the period but is insufficiently diversified relative to a cointegrated portfolio. Independent country markets do account for the bulk of global property diversification gains but cointegrated markets, particularly from the North American and Asia Pacific regions, retain some diversifying qualities. We also show cointegrated markets converge toward benchmark characteristics, reducing their attraction as portfolio candidates.

Benefits of Global Diversification on a Real Estate Portfolio

Capital flows are increasingly global across all asset classes, including the real estate world. Because global real estate portfolios contain assets influenced by different national economies, with very different drivers, growth rates, and risk, the correlation of total returns between assets in these markets can be very low. Low or negative correlations provide the ultimate recipe for the “free lunch” of modern portfolio theory: returns that are the weighted average of assets within the portfolio, but volatility less than the weighted volatility of the individual assets. Unlike the case in domestic investments, however, the movement of foreign exchange rates must be considered, as unfavorable currency movements can severely hinder performance. Real estate is generally a long-hold investment strategy, but property income and ultimately the final selling price will be received in the local currency and must, at some point, be repatriated to U.S. dollars. The authors examine investments in global office properties, both with and without currency exchange rate factors, and make a compelling case for investment in the global office sector instead of investment only in the U.S. market.

International portfolio diversification benefits: Cross-country evidence from a local perspective

We investigate how the benefits of international portfolio diversification differ across countries from the perspective of a local investor. We find that the benefits of investing abroad are largest for investors in developing countries, including when controlling for currency effects. Most of the benefits are obtained from investing outside the region of the home country. These global diversification benefits remain large when controlling for short-sales constraints in developing stock markets. The gains from international portfolio diversification appear to be largest for countries with high country risk. In addition to this cross-sectional evidence, we also provide evidence that diversification benefits vary over time as country risk changes. We find that diversification benefits have decreased for most countries in our sample over the past two decades.

Valuation Effects of Global Diversification

This paper examines the effect of global diversification on firm value using a data set of US firms from 1994 to 2002. We document that global diversification enhances firm value. Specifically, we find that Tobin's q, our proxy for firm value, increases with foreign sales (measured as a fraction of the firm's total sales), even after we control for well-known determinants of firm value. In contrast, we find no such evidence for industrial diversification. We find evidence of both financial and real effects driving such a value enhancement from global diversification. Furthermore, we find that the valuation benefits from global diversification are higher if the firm diversifies into countries with creditor rights that are stronger than those of the United States. Our results are also robust to controlling for the firm's endogenous choice to diversify across countries or across industries. Our study is anchored by the theories of both the financial and real dimensions of global diversification, and our results support both theories. Overall, our results provide a unifying view that global diversification benefits are driven by both the real and financial dimensions.

Do Investors Still Benefit from International Diversification With Investment Constraints?

The benefits of global diversification have been documented by financial economists over the past four decades. Since the correlations of asset yields across countries are lower than within a country, the volatility of a portfolio's return can be reduced, without sacrificing its expected return, by investing in overseas assets. Due to the lack of investibility of stocks in certain countries, however, investors may not necessarily be able to allocate assets by completely following the unrestricted efficient frontier suggested by Markowitz (1952). Previous studies investigate the strategies of asset allocation and the diversification benefits with short-selling constraints. Yet, the impact of over-weighting investment restrictions on the global diversification benefits remains unclear. Furthermore, while in theory the inclusion of more securities in a portfolio will help to diversify, in practice investors may wish to determine the optimal complementary investing areas in which securities generate the maximum marginal contribution to the portfolio. The answers to these issues provide critical insights for professionals of asset management. This paper empirically explores the potential advantages brought about by international diversification with various investment constraints such as short-selling, over-weighting, and investing regions for U.S. domestic investors. Our finding suggests that adding short-sales and over-weighting constraints reduces but does not eliminate the diversification benefits to the U.S. domestic investor. For cross-regional comparison, the greatest diversification benefits come from adding assets from the Central/West European and Latin American countries. The over-time analyses show that the absolute values of diversification benefits reduce over time as international markets become more integrated. However, the relative values of benefits suggest that international diversification is still desired by the U.S. investor.

Sector Integration and the Benefits of Global Diversification

One of the main reasons that investment advisors recommend international investments is that foreign stocks are not highly correlated with U.S. stocks. As world economies become increasingly interrelated, it may become more difficult for investors to achieve effective diversification. This research investigates international stock market correlation, and assesses whether global diversification on a sector basis is beneficial to U.S. investors. This analysis includes 38 developed and emerging stock markets from 1981-2000. In addition to demonstrating a potential loss of diversification benefits, this paper utilizes an optimal global asset allocation model to illustrate the effects of sector diversification on portfolio performance over time.

U.S. Multinationals as Vehicles for International Diversification

The authors consider whether investors can obtain the benefits of global diversification by purchasing the equity of U.S. multinational corporations. They find that USMNC returns tend to move with the swings of the U.S. market, irrespective of the location of their foreign operations, so they provide little in the way of global diversification. Other investment vehicles available to U.S. investors such as ADRs are more highly correlated with the returns in foreign markets.

The Performance of Actively Managed International Mutual Funds

International mutual funds allow individual investors to diversify abroad at a reasonable cost. This paper tests whether international funds that actively engage in country and security selection outperform passive global benchmarks. We apply a mean-variance efficiency test that incorporates the practical prohibition against short sales of open-end mutual funds. Our tests reject the efficiency of the world equity market portfolio over the sample period, and our funds as a group outperform the inefficient world index. However, we find no evidence of security selectivity ability using a 12-country benchmark. We do find that active international funds provide global diversification benefits. Tests using the Positive Period Weight (PPW) measure of Grinblatt and Titman (1989), which is robust to nonlinearity in fund and benchmark returns, yield similar results.