International portfolio diversification: An ICAPM approach with currency risk

Dimitrios Dimitriou () and Theodore Simos ()

MPRA Paper from University Library of Munich, Germany

Abstract: This article investigates international stock market integration in four major developed economies, namely the United States, the Economic and Monetary Union of the European Union, Japan and the United Kingdom, and two Asian emerging, countries namely China and India, over the period from June 1994 to June 2009. To model stock market integration we estimate a dynamic version of the international capital asset pricing model (CAPM) in the absence of purchasing power parity. Conditional variance is modelled via a multivariate GARCH specification. To investigate the evolution of integration overtime we estimate the CAPM in sub-periods. In addition, we connect our results to the timing of world financial crises. Our findings show that the stock markets tend to move in parallel after June of 2002, although from 2002 to 2006 there have not been crises events. These results support the increasing globalization and interdependence of both emerging and developed markets in the recent decade, reducing the benefits of portfolio diversification.

Keywords: international markets; market integration; financial crises; MGARCH specification (search for similar items in EconPapers)
JEL-codes: F36 G11 G15 (search for similar items in EconPapers)
Date: 2012-11-08
New Economics Papers: this item is included in nep-ifn
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Published in Macroeconomics and Finance in Emerging Market Economies (2012): pp. 1-13

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Journal Article: International portfolio diversification: an ICAPM approach with currency risk (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:42825

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