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Industry effects and volatility transmission in portfolio diversification

Author

Listed:
  • Vivek Bhargava
  • Akash Dania
  • Davinder Kumar Malhotra

    (School of Business Administration, School House Lane and Henry Avenue, Philadelphia University, Philadelphia)

Abstract

Conventional wisdom in portfolio diversification has always advocated diversification across countries rather than across industries due to low degrees of correlations among the stock markets around the globe. In recent years, with an increase in correlation among markets around the world, diversification across industries is being advocated as a tool to attain risk reduction. This study examines dynamic linkages between US equity market returns and nine biotechnology market returns in order to understand the dominance of country versus industry effects in portfolio diversification. Vector autoregression analysis shows that innovations in S&P500 returns have a significant and positive impact on the biotechnology market returns of the United States, the United Kingdom, Germany, France, Belgium, Switzerland, Japan and Emerging markets. Using GARCH, TGARCH we provide evidence of a positive and significant volatility spillover from S&P500 to biotechnology sector returns of the United States, the United Kingdom, Switzerland, Japan, Germany, France and Emerging markets, which means country effects do not help in risk reduction. Spillover effects are asymmetric for Switzerland, Japan, Germany, France, China and Belgium.

Suggested Citation

  • Vivek Bhargava & Akash Dania & Davinder Kumar Malhotra, 2012. "Industry effects and volatility transmission in portfolio diversification," Journal of Asset Management, Palgrave Macmillan, vol. 13(1), pages 22-33, February.
    • Handle: RePEc:pal:assmgt:v:13:y:2012:i:1:d:10.1057_jam.2011.17
    DOI: 10.1057/jam.2011.17
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    References listed on IDEAS

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    Cited by:

    1. Marcelo, José Luis Miralles & Quirós, José Luis Miralles & Martins, José Luís, 2013. "The role of country and industry factors during volatile times," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 273-290.
    2. Guglielmo Maria Caporale & Luis Alberiko Gil-Alana & Emmanuel Joel Aikins Abakah, 2023. "US policy responses to the COVID-19 pandemic and sectoral stock indices: A fractional integration approach," Applied Economics, Taylor & Francis Journals, vol. 55(3), pages 283-292, January.
    3. Kenneth David Strang, 2012. "Man versus math: Behaviorist exploration of post-crisis non-banking asset management," Journal of Asset Management, Palgrave Macmillan, vol. 13(5), pages 348-367, October.
    4. Jin, Jiayu & Han, Liyan & Wu, Lei & Zeng, Hongchao, 2020. "The hedging effectiveness of global sectors in emerging and developed stock markets," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 92-117.

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