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Portfolio diversification: a factor analysis approach

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  • Tak-Kee Hui

Abstract

One of the main purposes of modern portfolio theory is to deal with the merit of international diversification, which is closely linked to the issue of co-movement and interdependence between stock markets. The globalization of equity markets and the increasing growth potential of the emerging Asian markets in the recent years have attracted significant attention in their co-movements. This study aims to investigate the potential of diversifying into US and Asia Pacific markets in the perspective of a Singaporean investor. A factor analysis is first used to screen out certain stock markets before the portfolio is computed. In view of the recent Asian financial crisis in mid-1997, the study is also extended to include international diversification choices after the Asian crisis to provide a more comprehensive study for Singaporean investors. The idea of this research can be repeated from a different perspective such as the US point of view.

Suggested Citation

  • Tak-Kee Hui, 2005. "Portfolio diversification: a factor analysis approach," Applied Financial Economics, Taylor & Francis Journals, vol. 15(12), pages 821-834.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:12:p:821-834
    DOI: 10.1080/09603100500187901
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    Cited by:

    1. Chuang, I-Yuan & Lu, Jin-Ray & Tswei, Keshin, 2007. "Interdependence of international equity variances: Evidence from East Asian markets," Emerging Markets Review, Elsevier, vol. 8(4), pages 311-327, December.
    2. Mehmet Sahiner, 2024. "Volatility Spillovers and Contagion During Major Crises: An Early Warning Approach Based on a Deep Learning Model," Computational Economics, Springer;Society for Computational Economics, vol. 63(6), pages 2435-2499, June.
    3. Kasilingam Lingaraja & Murugesan Selvam & Vinayagamoorthi Vasanth & Ramachandran Rajesh Ramkumar, 2015. "Long-run Overseas Portfolio Diversification Benefits and Opportunities of Asian Emerging Stock Markets and Developed Markets," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 324-333.
    4. Caiado, Jorge & Crato, Nuno & Peña, Daniel, 2007. "Is there an identity within international stock market volatilities?," MPRA Paper 2069, University Library of Munich, Germany.
    5. James A. Yunker & Alice Melkumian, 2013. "Optimal diversification and risk-taking: a theoretical and empirical analysis," Applied Economics, Taylor & Francis Journals, vol. 45(11), pages 1481-1492, April.
    6. Kim Hiang Liow & James R. Webb, 2009. "Common factors in international securitized real estate markets," Review of Financial Economics, John Wiley & Sons, vol. 18(2), pages 80-89, April.
    7. Kim Liow & Muhammad Ibrahim, 2010. "Volatility Decomposition and Correlation in International Securitized Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 40(2), pages 221-243, February.
    8. Caiado, Jorge & Crato, Nuno, 2007. "A GARCH-based method for clustering of financial time series: International stock markets evidence," MPRA Paper 2074, University Library of Munich, Germany.
    9. Tobias Berens & Dominik Wied & Daniel Ziggel, 2014. "Automated Portfolio Optimization Based on a New Test for Structural Breaks," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 2(2), pages 243-264, April.
    10. Anubha Goel & Damir Filipovi'c & Puneet Pasricha, 2024. "Sparse Portfolio Selection via Topological Data Analysis based Clustering," Papers 2401.16920, arXiv.org.
    11. Liow, Kim Hiang & Schindler, Felix, 2011. "An assessment of the relationship between public real estate markets and stock markets at the local, regional, and global levels," ZEW Discussion Papers 11-056, ZEW - Leibniz Centre for European Economic Research.
    12. Walid M.A. Ahmed, 2012. "On the interdependence structure of market sector indices: the case of Qatar Exchange," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 11(4), pages 468-488, October.
    13. Caiado, Jorge & Crato, Nuno, 2008. "Identifying the evolution of stock markets stochastic structure after the euro," MPRA Paper 6609, University Library of Munich, Germany.
    14. Andile Khula & Ntebogang Dinah Moroke, 2017. "The Performance of Maximum Likelihood Factor Analysis on South African Stock Price Performance," Journal of Economics and Behavioral Studies, AMH International, vol. 8(6), pages 40-51.
    15. Kim Hiang Liow & Felix Schindler, 2014. "An Assessment of the Relationship between Public Real Estate and Stock Markets at the Local, Regional, and Global Levels," International Real Estate Review, Global Social Science Institute, vol. 17(2), pages 157-202.

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