International portfolio diversification: Currency, industry and country effects revisited

E. Eiling, B. Gerard, P. Hillion, F.A. de Roon

Research output: Contribution to journalArticleScientificpeer-review

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 show 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.
Original languageEnglish
Pages (from-to)1249-1278
JournalJournal of International Money and Finance
Volume31
Issue number5
DOIs
Publication statusPublished - 2012

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Industry
Currency
Risk factors
Currency risk
Industry effects
International portfolio diversification
Country effects
Equity returns
Relative importance
Mean-variance efficiency
World market
Country differences
Market risk
Investment strategy
Factors
Diversification benefits
International stock returns
Testing
International markets
Alternative investments

Cite this

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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 show 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.",
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International portfolio diversification : Currency, industry and country effects revisited. / Eiling, E.; Gerard, B.; Hillion, P.; de Roon, F.A.

In: Journal of International Money and Finance, Vol. 31, No. 5, 2012, p. 1249-1278.

Research output: Contribution to journalArticleScientificpeer-review

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AU - Gerard, B.

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AU - de Roon, F.A.

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DO - 10.1016/j.jimonfin.2012.01.015

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