pdf Are Strategies for International Diversification by Country, Industry and Region Equivalent?

Rachid Ghilal 1, Ahmed Marhfor 2,*, M’Zali Bouchra 3, Jean Jacques Lilti 4

1 University of Quebec in Rimouski (UQAR)
2 University of Quebec in Abitibi- Témiscamingue (UQAT)
3 ESG/UQÀM Montréal
4 University of RENNES1

In this study, we examine whether international portfolio diversification still matters despite an increase in the cross-country correlations of assets returns. More specifically, we explain why an increase in global return correlations does not necessarily imply a reduction in the benefits of international portfolio diversification. We also propose to compare empirically two traditional strategies of international diversification (by country and industry) in addition to a new strategy (by region) using two different methodological approaches, namely the mean variance spanning and multivariate cointegration analysis. Over the full sample period (1994- 2008), our results suggest that the three strategies of international diversification remain effective despite the secular increase in the cross-country return correlations. When we divide the sample into two different sub-periods (1994-2000 and 2000-2008), the findings indicate that the strategy based on regional diversification proved to be a new competing strategy during the second period in comparison to the other two traditional strategies.

Keywords: International diversification, Countries Industries/sectors Regions, Market indexes, Mean variance spanning, Cointegration

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