Market segmentation and international diversification across country and industry portfolios |
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| Institution: | 1. Edinburgh Napier University, The Business School, Accounting and Finance Subject Group, EH14 1DJ, Edinburgh, UK;2. Yasar University, Faculty of Business, Department of International Trade and Finance, Izmir, Turkiye;3. Montpellier Business School, 2300 Av. des Moulins, 34080 Montpellier, France;4. Department of Investment and Financial Markets, Institute of Finance, Poznan University of Economics and Business, Poznan, Poland |
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| Abstract: | We conjecture that partially segmented stock indexes that are characterized by low correlation with the world market are mainly priced by local factors and should produce abnormal returns relative to a global asset-pricing model. This implies a negative relation between correlation and future index returns in the presence of segmented indexes. Empirical evidence confirms such a relationship for the sample of industry indexes, suggesting a heterogeneous segmentation. However, we do not observe a similar pattern for country indexes. In addition, the international diversification potential of industries does not vanish during volatile periods. The hypothesis that the negative relationship should be stronger for the more segmented subsamples that are characterized by small market size and emerging country origin is verified for the industry sample. Thus, cross-industry diversification is superior to mere cross-country diversification. |
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| Keywords: | International portfolio diversification Industry diversification Country diversification Partial segmentation and integration Index return correlations |
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