International portfolio diversification: Currency,industry and country effects revisited |
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| Authors: | Esther Eiling Bruno Gerard Pierre Hillion Frans A de Roon |
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| Institution: | 1. University of Toronto, Rotman School of Management, 105 St. George Street, Toronto, Ontario M5S 3E6, Canada;2. Norwegian School of Management BI and Tilburg University, Nydalsveien 37, 0442 Oslo, Norway;3. INSEAD, 1 Ayer Rajah Avenue, 138676 Singapore, Singapore;4. Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands |
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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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| Keywords: | G11 G15 |
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