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Sector Integration and the Benefits of Global Diversification

Author

Listed:
  • Mitchell Ratner

    (Rider University, New Jersey, USA)

  • Ricardo P. C. Leal

    (COPPEAD Graduate School of Business, Brazil)

Abstract

One of the main reasons that investment advisors recommend international investments is that foreign stocks are not highly correlated with U.S. stocks. As world economies become increasingly interrelated, it may become more difficult for investors to achieve effective diversification. This research investigates international stock market correlation, and assesses whether global diversification on a sector basis is beneficial to U.S. investors. This analysis includes 38 developed and emerging stock markets from 1981-2000. In addition to demonstrating a potential loss of diversification benefits, this paper utilizes an optimal global asset allocation model to illustrate the effects of sector diversification on portfolio performance over time.The results indicate that although the correlation between most foreign sectors and U.S. sectors is increasing over time, there are still substantial international diversification benefits. Further, the inclusion of emerging market sectors may significantly enhance the return-to-risk performance of international portfolios.

Suggested Citation

  • Mitchell Ratner & Ricardo P. C. Leal, 2005. "Sector Integration and the Benefits of Global Diversification," Multinational Finance Journal, Multinational Finance Journal, vol. 9(3-4), pages 237-269, September.
    • Handle: RePEc:mfj:journl:v:9:y:2005:i:3-4:p:237-269
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    References listed on IDEAS

    as
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    Cited by:

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    4. Ignatius Roni Setyawan & Buddi Wibowo, 2021. "Does Entropy Index Explain the Determinant of Capital Market Integration in ASEAN?," Capital Markets Review, Malaysian Finance Association, vol. 29(1), pages 17-39.
    5. Pelin Bengitöz & Mehmet Umutlu, 2023. "Are return predictors of industrial equity indexes common across regions?," Journal of Asset Management, Palgrave Macmillan, vol. 24(5), pages 396-418, September.

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    More about this item

    Keywords

    sectors; optimal portfolio; international diversification; co-movement;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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