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International portfolio diversification: currency, industry and country effects revisited

Eiling, Esther; Gerard, Bruno; Hillion, Pierre; Roon, Frans A. de
Journal article, Peer reviewed
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URI
http://hdl.handle.net/11250/93568
Date
2012
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  • Scientific articles [1334]
Original version
http://dx.doi.org/10.1016/j.jimonfin.2012.01.015
Abstract
We examine the relative importance of country, industry, world market and currency risk factors for international stock returns. Our approach focuses on testing the mean-variance efficiency of the various factor portfolios. An unconditional analysis does not detect significant differences between country, industry and world portfolios, nor any role for currency risk factors. However, when we allow expected returns, volatilities and correlations to vary over time, we find that equity returns are mainly driven by global industry and currency risk factors. We propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets.
Description
This is the authors’ final, accepted and refereed manuscript to the article
Publisher
Elsevier
Journal
Journal of International Money and Finance

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