International Portfolio Diversification Research Articles

Impact of Portfolio Performance on International Portfolio Diversification

Investment opportunity is what we all are looking for every now and then, avenues that can generate maximum return with minimum of risk. International Portfolio diversification may not fulfill aspiration of investors with globalization spreading its wings in each sphere of economic activity. The study has been conducted from the perspective of Indian Investor taking into account 22 foreign markets (11 emerging and 11 developed). The countries have been selected from two points of view; firstly on the basis of market capitalization and secondly on the basis of availability of data. Emerging markets chosen for the study contribute more than 80% in Emerging market Index which is sufficient to generalize the results to the whole. Geographical regions have also been taken into consideration in order to benefit from regional diversification; these are Asia-pacific with 13 markets, 8 markets from Europe, 3 from Latin America and USA. Firstly, portfolios with different investment objective would be chosen on the basis of sampled countries. Then testing co-integration study would help in elimination of those countries generating co-integrating vector. Hence, Indian investor would be benefited by the study to find out whether globally diversified portfolio is better or not as compared to domestic portfolio. International portfolio diversification can be suggested for Indian investor in the wake of its performance during structural breaks.

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.

The implications of non‐synchronous trading in G‐7 financial markets

AbstractWe investigate the effects of non‐synchronous trading on volatility spillover for the G‐7 equity markets during the Eurozone sovereign debt crisis (ESDC) and the Covid‐19 pandemic crisis. For data synchronisation we utilise ΜΑ(1) adjusted return series to estimate the Baba‐Engle‐Kraft‐Kroner (BEKK) and the dynamic conditional correlation (DCC) models. We also consider the use of realised kernels as explanatory variables in the variance equation. In this set up, the contagion effects during crises periods are more perceptible, as the spikes are easier to interpret. We also check the robustness of our main results by applying, wavelet coherence analysis to G‐7 major equity indices with realised kernels, as well as local Gaussian correlations (LGC). Our findings suggest the empirical significance of the synchronisation effects for the US and the other G‐7 equity markets. We also conclude that realised kernels is an effective tool for mitigating non‐synchronous effects. These results underline the significance of quantifying the synchronisation effects in equity markets as well as international portfolio diversification strategies.

Financial Integration and Variance Decomposition of Asian Stock Market: Evidence from India

Manuscript type: Research paper Research aims: International investments made in non-integrated economies provide benefits of portfolio diversification, but investment made in integrated economies may lead to oscillations due to volatility spillover. Therefore, the knowledge of market linkage of an economy is imperative for investors, as well as regulators. In this context, the present paper investigates the financial integration of the Indian stock market with China, Hong Kong, Japan, UK and USA. Design/Methodology/Approach: To examine the financial integration in the long run, closing daily indices of leading stock markets of respective countries have been analysed through the Johansen cointegration method over a period of 20 years from 2002 to 2022. The vector error correction model has been applied to examine whether market equilibrium can be restored after an infusion of shock. The short run linkage has been investigated through a causality test. Further the possibility of volatility spillover has been examined through variance decomposition and impulse response function. Research findings: The results show cointegration among the selected markets, which indicates the possibility of convergence towards market equilibrium in the long run. The stock markets of India and USA were observed to have a bidirectional causal relationship indicating lesser chances of benefits from international portfolio diversification. The results reveal the sensitivity of the Indian stock market to innovations in the UK and USA. However, no significant influence of the Hong Kong, Japanese, and Chinese stock markets has been observed on the Indian stock market. Further, the Indian stock market has a significant contribution to the volatility of other stock markets, except the Chinese stock market. Theoretical contribution/Originality: The present study is crucial owing to two prominent reasons. Firstly, the linkage between various financial markets is very dynamic and needs to be studied in the present context. Secondly, the linkage of Indian economy with other countries has increased manifolds in recent few years so it will be fruitful to analyse the linkage of Indian economy with other economies. Practitioner/Policy implications: The findings are useful to investors while designing international portfolios to reap diversification benefits. The results are fruitful for market regulatory bodies to mitigate the adverse impact of volatility spillover. Research limitation/Implications: The study can be extended to other markets, monthly data and different sub-periods

DO DIFFERENT SECTORS AFFECT EQUITY RISK PREMIUMS IN EMERGING MARKETS? EVIDENCE FROM ASIA

This paper explores intricacies of the higher equity risk premia of emerging Asian economies within the context of industrial composition. The conventional ex-post empirical analysis is executed to scrutinize the impact of industries on the country's stock performance, diverging from the contemporary literature on finance, which was restricted to "total market indexes." By utilizing the DataStream’s Total Return Indices (TRIs) data of emerging market industries, this study highlights the contribution of various industries towards higher equity risk premiums across prominent Asian emerging countries. The study unearths several salient empirical findings. Primarily, the study confirms the "high-volatile high-performance nature" in conjunction with the time-varying dynamics of excess returns for emerging markets at the industry level. Secondly, the study's findings identify the industries accountable for the most significant contribution to higher stock premia of emerging markets at both the country and dynamic context levels. Thirdly, we observe that certain industries demonstrate greater exposure to global factors than others. It is, therefore, argued that these observations provide a crucial indication for international portfolio diversification. The investigation of diversification opportunities due to the impact of global factors on country indexes, and the existence of some industries that offer little but advantageous insurance components provide valuable insights for the higher equity premia of emerging markets. The overall study findings suggest that foreign portfolio investors must not only diversify across countries but also across industries to generate augmented returns in emerging stock markets.

Research on Portfolio International Diversification and Forecasting the Future Market

International portfolio diversification could tackle the problem of the case of high risk but low return of one single investment. It could be the combination of any two or even more investments. Selecting investments that involve bright prospects is essential. As long as the selection of portfolio is feasible and desirable, the result of the investment would be considerable. The paper mainly tells the importance of portfolio international diversification as well as the models of forecasting the future market. The purpose of this paper is to make sure that the investors can take the least risk but earn the biggest possible income. The portfolio is an investing method that deserves concern. Based on this, deciding which model to use to forecast the future market is necessary. The paper has outlined several models as well as calculations for investors to choose from. Furthermore, the pros and cons of each of them are concluded, and the comparisons between each are made.

Diversification with globally integrated US stocks

We measure market integration at a firm-level for the US stock market with the rest of the world. The properties of firm-level integration are explored across time and industries and then stocks are sorted into high- and low-integration portfolios. The role of the least globally integrated US stocks in domestic and international portfolio diversification is assessed. We show that these stocks can statistically and economically augment diversification potential, especially after 2000. The same stocks can be combined with the US market index to create a portfolio that performs at least as well as an international index portfolio in terms of risk-adjusted returns and tail risk.

Contagion Effect Between Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Nasdaq

This comprehensive study investigates the contagion effect and relationships among three major stock exchanges—specifically, the two largest stock exchanges in India, BSE (Bombay Stock Exchange) and NSE (National Stock Exchange), and the globally renowned NASDAQ—spanning an extensive eight-year period on a daily basis. Employing a robust analytical framework in E-views, the study conducts a suite of tests, including Unit Root tests, Granger causality analysis, Johansen's Cointegration test, Vector Error Correction Models (VECM), and Dynamic Ordinary Least Squares (DOLS). The results of our investigation reveal a significant cointegration among BSE, NSE, and NASDAQ, indicating a long-term relationship between these stock exchanges. Notably, the study establishes that BSE Granger causes NSE, given their shared national context. Moreover, in an international context, NASDAQ emerges as a Granger cause for both BSE and NSE, while NSE Granger causes NASDAQ. This nuanced understanding of Granger causality relationships has profound implications for investors seeking to optimize their portfolios. Importantly, our findings suggest a viable strategy for portfolio diversification, emphasizing the potential benefits of allocating investments across stock exchanges with limited correlation. Specifically, investors can strategically diversify their portfolios by considering exchanges that do not exhibit Granger causality relationships with each other. This insight provides a practical guide for investors looking to capitalize on opportunities in markets with distinct and uncorrelated movements, thereby enhancing the effectiveness of international portfolio diversification. In essence, this study underscores the feasibility of diversification between exchanges with no observed Granger causality relationships, shedding light on the nuanced dynamics of inter-market dependencies. Investors can leverage these findings to make informed decisions, mitigating risks, and capitalizing on diverse opportunities across global financial markets.

Foreign Bias in the Global Portfolio Investment of Selected OIC Countries

Home bias reflects the propensity of investors to invest substantially in the domestic market. When investing abroad investors exhibit foreign bias, a tendency to overweight certain foreign markets based on their preferences. A thorough review of the literature reveals that foreign bias has not been thoroughly investigated in emerging countries, especially in the context of OIC countries. The purpose of this research is to examine the determinants of foreign bias in the global portfolio investment of selected OIC countries. An unbalanced bilateral panel data of 12 OIC countries’ outward equity investment in 74 host countries from the year 2001 to 2016 is analyzed. Cross-sectional analysis shows that OIC countries exhibit higher foreign bias towards their OIC counterparts especially in the MENA region. The results suggest, OIC countries not only exhibit foreign bias but also demonstrate regional bias. System Generalized Method of Moments (GMM) empirically shows that foreign bias is possibly explained by factors related to financial market openness, familiarity, information asymmetry, and global financial crisis. This study has a significant implication for the investors, fund managers and the regulators of the OIC countries. Investors and fund managers in OIC countries should be aware of the existence of foreign bias in their global portfolio investment that may potentially reduce the benefits of optimal diversification. It is a call for policymakers in the OIC countries to convince their local investors that international portfolio diversification offers risk sharing and eventually increases investment return.

How prone are emerging markets' sectoral indices to global uncertainties? Evidence from the quantile connectedness approach with portfolio implications

PurposeThere has been a burgeoning interest in exploring the impact of uncertainty factors on share returns. However, studies on the influence of global financial uncertainties on emerging market sectoral indices are scarce. Thus, there is a need to have a thorough investigation of the connection between global financial uncertainties and emerging market sectoral indices. To fill this gap, using the theoretical framework of international portfolio diversification (IPD) and utilizing data from 2008 to 2021, this study examines the spillover connection between global uncertainty indices (GUIs) and leading sectoral indices of 28 emerging markets.Design/methodology/approachThe authors employ the quantile spillover-based connectedness approach and minimum connectedness portfolio approach to explore the dynamic connectedness among sectoral indices and global uncertainty indices (GUIs) as well as portfolio implication.FindingsThe study found high connectedness among all indices, especially at higher and lower quantiles. Among GUIs, the authors find that stock market volatility (VIX) and oil volatility index (OVX) are strongly interconnected with all leading emerging markets' sectoral indices. Among sectoral indices, the linkage between the financial (F-Index), information technology (IT-Index), and consumer discretionary (CD-Index) sectors shows moderate interconnectedness. In contrast, the communication services (CS-Index) sector has low interconnectedness with the system. In terms of spillover effects, the authors find EVZ, OVX, and the IT sectors to be net recipients for the entire period. The authors also explored portfolio diversification benefits by employing a minimum connectedness portfolio approach. The cumulative returns' findings show a slight decline in the portfolio's value after 2010; during 2012, the pattern remained stable; from 2014 to 2020, the portfolio performed negatively, that is, underperformance due to different events in that period, including COVID-19. The Consumer Discretionary sector is found to be significant because of having the largest weight, 51%, in the portfolio during the study period.Practical implicationsThe study suggests that investors should invest in the communication services sector as it is the least connected. However, the connectedness increases during COVID-19, which implies that it may be difficult for investors to benefit from IPD in a crisis period. Hence, to obtain the benefits from IPD, the evidence suggests that investors need to consider Consumer Discretionary sector while considering assets for investment.Originality/valueThe study's uniqueness is that the authors have investigated spillover between GUIs and 28 emerging markets sectoral indices by employing a quantile spillover-based connectedness approach and minimum connectedness portfolio approach with a special focus on portfolio implication.

Cointegration of Asian Developed and Frontier Stock Markets: An investigation of Diversification Opportunities

This study examines the cointegration relationship of the Colombo Stock Exchange (CSE) with developed Asian markets (Hong Kong, Japan, Singapore). The main objective of the study is to identify potential diversification benefits that exist in Sri Lankan stock market. The stock market indices are Hang Seng Index (HSI), Nikkei 225(N225), Straits Times Index (STI) and All Share Price Index (ASPI). Daily closing prices of stock market indices were selected for the period of 2013- 2019. The main theoretical base forthe stock market integration was the Law of One Price. The Autoregressive-Distributed Lag (ARDL) bound test used toanalyze data, revealed an insignificant cointegration relationship between CSE and developed stock markets. The ASPI has statistically significant short-run relationships with the STI. HSI and N225 did not provide any evidence of a long-run relationship with the ASPI. A negative insignificant correlation between ASPI and HSI indicates a good combination to have a well-balancedportfolio gain both long and short-run diversification benefits. In conclusion, the non-existence of cointegration among the above stock markets provides opportunities for international diversification of portfolios and possibilities for risk hedging.
 Keywords: Cointegration, Frontier and Developed, Stock Markets, Portfolio Diversification

Impact of major stock markets on China's stock market

PurposeThe main purpose is to explore the impact of major stock markets on China's market where major markets are represented by former G8 nations (current G7 and Russia).Design/methodology/approachThe article makes use of: stationarity tests (ADF and PP unit root); long-run correlation tests (Johansen integration involving trace and maximum eigenvalue); impact of G8 markets on China (VECM test); influence of G8 markets on volatility in China's market (variance decomposition analysis) and, effect from shocks in G8 markets on China (impulse response function).FindingsUsing a period of 2009–2019 that avoids detecting linkages caused by interdependencies created by two major international crises, the article offers four major findings. First, except for Germany and Russia, G8 markets have a significant causal influence on China with UK having the greatest. Second, G8 markets are not the major source of short-run fluctuation in China's market but over time exercise a noteworthy collective impact with UK having the greatest impact. Third, there are occasions for international portfolio diversification with China's market providing greater diversification than G8 nations. Fourth, all markets provide a short-run window of abnormal profit.Research limitations/implicationsThe indexes used to represent national markets are assumed to be adequate representations.Practical implicationsShort-term abnormal profits exist. Investing in China, compared to G8 countries, offers greater portfolio diversification possibilities.Social implicationsRemoval of trade and investment barriers cause greater market integration.Originality/valueBy using recent data, this study reveals that G8 stock markets influence China's market.

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.

Possibility versus feasibility: International portfolio diversification under financial liberalization

Financial liberalization may have double-edged impacts on international portfolio diversification since it increases financial market integration and market correlation simultaneously. Financial market integration enhances the possibility of diversifying portfolios internationally, while financial market correlation reduces the feasibility of such a diversification benefit. Using a dataset of stock market across 35 countries over the period 2001–2021, this paper examines the “possibility versus feasibility” puzzle arising from international portfolio diversification under financial liberalization. The empirical results show that financial liberalization has a positive (negative or no) impact on diversification benefits in its early (medium or developed) stage respectively due to its dual effects. Moreover, market integration positively affects diversification benefits only in the early stage of financial liberalization, while market correlation consistently has a negative impact on diversification benefits. Furthermore, this paper proposes an integration-correlation-oriented (ICO) diversification strategy to address the “possibility versus feasibility” puzzle, enabling international investors to make appropriate decisions on international portfolio diversification under financial liberalization.

Analisis Risiko Investasi Saham Melalui Diversifikasi Portofolio secara Domestik dan Internasional

Along with the development of the era of globalisation and accelerating economic growth, investments can be made in various types of relatively high-risk investment instruments, such as stocks on both the national capital market and international capital markets. One investment option that promises high returns with high risk is stock investment. Therefore, the authors are interested in further discussing international investment risk assessment. The purpose of this study is to determine the risks of investing in stocks through domestic and international portfolio diversification. The research method used in this research is descriptive method. The analysis technique used is the analysis of literature studies
 Keywords: Stock Investment Risk, Portfolio Diversification, Domestic, International

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.

A study on equity home bias using vine copula approach

The study investigates if the mean-downside risk optimization technique for asset allocation can shed new light on the equity home bias puzzle. We propose a combined EGARCH-EVT-C-vine copula approach to properly capture the stylized properties of asset return series and estimate the downside risk appropriately by CVaR. Using weekly stock price data from 12 countries including seven G7 countries and five BRICS countries, we estimate international portfolio allocations based on mean-CVaR optimization model and compare the results to the mean–variance allocations. The study has been done from the perspective of US investors. The results of the study suggest that the US equity home bias is overestimated by the mean–variance approach. The mean-CVaR model helps to factor in the additional risk that investors face in international portfolio diversification and provides a plausible empirical explanation for the equity home bias phenomenon. The findings of the study have direct implications for portfolio managers and investors for taking better international investment decisions based on the knowledge of optimum portfolio.

Contagion Effects of Covid-19 on Select Stock Market Indices

We examine the impact of the COVID-19 pandemic on the interlinkages between the Indian stock market and some of the largest indices across the world. We compare the co-movements of these stock markets to identify the possibilities for international portfolio diversification. We use the Johansen cointegration technique and Vector Error Correction Mechanism to understand the nature of long-run and short-run cointegration. We also apply the Impulse Response Function to understand the time effects of the shock. The results of the Johansen cointegration test indicate that there is an increased level of cointegration among the stock market indices post the pandemic. Our results of VEC Block Exogeneity Wald Tests indicate that in the preCovid time, there were linkages between the stock markets of India and the U.K., Japan, and Hongkong. However, the post-pandemic results indicate the shock transmission effects from India to two very important European indices, i.e., the U.K. and Euronext stock exchanges, and to the stock market of Japan. We also observe transmission effects from the USA to India post-Covid period.

International portfolio diversification and the home bias puzzle

We review the literature on equity home bias, a phenomenon stating that investors do not hold enough foreign equities for an optimally diversified portfolio. We begin by defining the home bias measurement and reviewing related evidence on the bias. Further, we consider four explanations for this puzzling phenomenon: barriers to foreign investment, country-specific risks, information asymmetry, and cultural and behavioral factors. We analyze the related theoretical arguments and empirical findings of prior studies within each explanation. Based on the discussion of previous studies, several avenues for future research are suggested. (JEL G11, G15, F41)

A study on the nonlinear dynamics of ASEAN financial integration

PurposeThis study examines the co-integration relationships between Association of Southeast Nations (ASEAN) stock indices as a way to assess the feasibility of policy initiatives to strengthen market integration in ASEAN and identify implications for portfolio investors.Design/methodology/approach The authors employ threshold co-integration tests and a non-linear autoregressive distributed lag (NARDL) model to study the asymmetric dynamics of ASEAN equity markets. The study’s data cover the 2009–2022 period for seven member states: Cambodia, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.FindingsThe authors find evidence supporting co-integration relationships; adjustment toward equilibrium is asymmetric in the short run and symmetric in the long run for these countries. While co-movement in ASEAN equity markets seems encouraging for initiatives seeking to foster financial integration in regional economies, the benefits for international portfolio diversification appear to be neutralized.Originality/valueThe issue of stock market integration is important among policymakers, investors and academics. This study examines the level of stock market integration in ASEAN during the 2009–2022 period. For this purpose, advanced co-integration techniques are applied to different frequencies of data (daily, weekly and monthly) for comparison and completeness. The empirical analysis of this study is conducted using the Enders and Siklos (2001) co-integration and threshold adjustment procedure. This advanced co-integration technique is superior compared to other co-integration techniques by permitting asymmetry in the adjustment toward equilibrium.