On the robustness of international portfolio diversification benefits to regime-switching volatility |
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| Authors: | Thomas J. Flavin Ekaterini Panopoulou |
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| Affiliation: | 1. Department of Economics, NUI Maynooth, Maynooth, Co. Kildare, Ireland;2. Department of Statistics and Insurance Science, University of Piraeus, Greece;1. Board of Governors of the Federal Reserve System, USA;2. Darden Graduate School of Business, University of Virginia, USA;3. Institute for International Integration Studies, Trinity College Dublin, Ireland;4. Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, USA;5. National Bureau of Economic Research, USA;6. Phatra Securities Public Company Limited, Thailand;1. Vienna University of Economic and Business, Institute of Macroeconomics, Austria;2. Vienna University of Economic and Business, Institute for International Economics and Development, Austria |
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| Abstract: | We examine if the benefits of international portfolio diversification are robust to time-varying asset return volatility. Since diversified portfolios are subject to common cross-country shocks, we focus on the transmission mechanism of such shocks in the presence of regime-switching volatility. Generally, market linkages are stable with little evidence of increased market interdependence in turbulent periods. Furthermore, risk reduction is consistently delivered for the US investor who holds foreign equity. |
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