Abstract
By diversifying stock selection on an international basis, portfolio managers hope to improve the trade-off between risk and reward through a reduction in within-portfolio correlation levels. Although the benefits of this procedure can be considerable, the process of stock selection is not always clear cut. It was argued more than twenty years ago by French and Poterba (1991) that behavioral factors, such as biases in investor expectations, can lead to under-diversification in the international dimension. Portfolio managers wanting to optimize their stock selection can now be seen to face another important issue; namely, whether or not financial crisis results in significant long-term permanent changes in between-market correlation levels.
Corresponding author.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Similar content being viewed by others
References
Barari, M. (2004). Equity Market Integration in Latin America: A Time-Varying Integration Score Analysis. International Review of Financial Analysis, 13, 649–68.
Bekaert, G., Harvey, C. R. and Lumsdaine, R. L.(2002). Dating the Integration of World Equity Markets. Journal of Financial Economics, 65, 203–47.
Bekaert, G. and Wu, G. (2000). Asymmetric Volatility and Risk in Equity Markets. Review of Financial Studies, 13, 1–42.
BIS (2012) Basel III — Basel Committee on Banking Supervision, http://www.bis.org/bcbs/basel3.htm, date accessed 22 May 2012.
Crotty, J. (2009). Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’. Cambridge Journal of Economics, 33 (4), 563–80.
Emerging Markets (2010) Institutional Investment: Into the breach, http://www.emergingmarkets.org/Article/2690752/INSTITUTIONAL-INVESTMENT-Into-the-breach. html, date accessed 22 May 2012.
Engle, R. (2002). Dynamic Conditional Correlation — A Simple Class of Multivariate GARCH Models. Journal of Business and Economic Statistics, 20, 339–50.
Engle, R. F. and Sheppard, K. (2001). Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH. NBER Working Paper 8554.
Forbes, K. J. and Rigobon, R. (2002). No Contagion, Only Interdependence: Measuring Stock Market Co-movements. Journal of Finance, 57 (5), 2223–61.
Fratzschler, M. (2002). Financial Market Integration in Europe: On the Effects of Euro area on Stock Markets. International Journal of Finance and Economics, 7, 165–93.
French, K. R. and Poterba, J. M. (1991). Investor Diversification and International Equity Markets. American Economic Review, 81 (2), 222–6.
Garnaut, R. (1998). The Financial Crisis: A Watershed in Economic Thought About East Asia. Asian-Pacific Economic Literature, 12 (1), 1–11.
Geithner, T. (2008). Comments by New York Fed President Timothy Geithner. Wall Street Journal. 30 May.
Ghalanos, A. (2011) rgarch: Flexible GARCH modelling in R, http://r-forge.r-project.org/projects/rgarch/. date accessed 18 May 2012.
Glosten, L. R., Jagannathan, R. and Runkle, D. E. (1993). On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks. Journal of Finance, 48 (5), 1779–801.
Goetzmann, W. N., Li, L. and Rouwenhorst, K. G. (2005). Long-term Global Market Correlations. Journal of Business, 78 (1), 1–38.
Gupta, R. and Mollik, A. T. (2008). Volatility, Time Varying Correlation and International Portfolio Diversification: An Empirical Study of Australia and Emerging Markets. International Research Tournal of Finance and Economics. 18. 18–37.
Jagannathan, R. and Wang, Z. (1996). The Conditional CAPM and the Cross-Section of Expected Returns. Journal of Finance 51 (1) 3–53.
Jithendranathan, T. (2005). What Causes Correlations of Equity Returns to Change Over Time? A Study of the US and the Russian Equity Markets. Investment Management and Financial Innovation, 4, 69–79.
Karolyi, G. A. and Stulz, R. M. (1996). Why Do Markets Move Together? An Investigation of U.S. Japan Stock Return Comovements. Journal of Finance, 51, 951–86.
Kearney, C. and Lucey, B. M.(2004). International Equity Market Integration: Theory, Evidence and Implications. International Review of Financial Analysis, 13, 571–83.
King, T.-H.D. and Wen, M.-M. (2011). Shareholder Governance, Bondholder Governance, and Managerial Risk-Taking. Journal of Banking & Finance, 35 (3), 512–31.
Knif, J. and Pynnonen, S. (2007). Volatility Driven Changes in Stock Return Correlation Dynamics. Managerial Finance, 33 (3), 220–35.
Laopodis, N. T.(2005). Portfolio Diversification Benefits within Europe: Implications for a US Investor. International Review of Financial Analysis, 14, 455–76.
Longin, F. and Solnik, B. (1995). Is the Correlation in International Equity Returns Constant: 1960–1990? Journal of International Money and Finance, 14, 3–26.
Longin, F. and Solnik, B. (2001). Extreme Correlation of International Equity Markets. Journal of Finance, 56, 649–76.
Lucey, B. M. and Muckley, C. (2011). Robust Global Stock Market Interdependencies. International Review of Financial Analysis, 20, 215–24.
Mann, H. B. and Whitney, D. R. (1947). On a Test of Whether One of Two Random Variables Is Stochastically Larger Than the Other. Annals of Mathematical Statistics, 18, 50–60.
Markwat, T., Kole, E. and van Dijk, D. (2009). Contagion as a Domino Effect in Global Stock Markets. Journal of Banking & Finance, 33 (11), 1996–2012.
Meric, I., Ratner, M. and Meric, G. (2008). Co-movements of Sector Index Returns in the World’s Major Stock Markets in Bull and Bear Markets: Portfolio Diversification Implications. International Review of Financial Analysis, 17, 156–77.
Minsky, H. P. (1992). The Financial Instability Hypothesis. The Jerome Levy Economics Institute, Working Paper74.
Moshirian, F. (2011). The Global Financial Crisis and the Evolution of Markets, Institutions and Regulation. Journal of Banking & Finance, 35 (3), 502–11.
MSCI (2012) MSCI Global Equity Indices, http://www.msci.com/products/indices/, date accessed 18 May 2012.
NBER (2012) US Business Cycle Expansions and Contractions, http://www.nber.org/ cycles/cyclesmain.html,date accessed 18 May 2012.
Nelson, D. B.(1991). Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica, 59 (2), 347–70.
R (2012) The R Project for Statistical Computing, http://www.r-project.org/index.html, date accessed 18 May 2012.
Ramchand, L. and Susmel, R. (1998). Volatility and Cross Correlation across Major Stock Markets. Journal of Empirical Finance, 5, 397–416.
Schwebach, R. G., Olienyk, J. P. and Zumwalt, J. K. (2002). The Impact of Financial Crises on International Diversification. Global Financial Journal, 13, 147–61.
Solnik, B. H. (1995). Why Not Diversify Internationally Rather Than Domestically? Financial Analysts Journal, 51 (1), 89–94.
Solnik, B., Bourcrelle, C. and Fur, Y. L. (1996). International Market Correlation and Volatility. Financial Analysts Journal, 52, 17–34.
Swanson, P. E. (2003). The Interrelatedness of Global Equity Markets, Money Markets, and Foreign Exchange Markets. International Review of Financial Analysis, 12, 135–55.
US Treasury (2010) Troubled Asset Relief Program: Two Year Retrospec-tive, http://www.treasury.gov/initiatives/financial-stability/briefing-room/reports/ agency_reports/Documents/TARP%20Two%20Year%20Retrospective_10%2005% 2010_transmittal%2Oletter.pdf, date accessed 18 May 2012.
Welch, B. L.(1938). The Significance of the Difference between Two Means When the Population Variances Are Unequal. Biometrika, 29, 350–62.
Whalen, C. J. (2008). The Credit Crunch: A Minsky Moment. Studi e Note di Economia, XIII (1), 3–21.
Wilcoxon, F. (1945). Individual Comparisons by Ranking Methods. Biometrics, 1, 80–3.
Yahoo (2012) VIX Index, http://uk.finance.yahoo.com/q?s=%5EVIX, date accessed 22 May 2012.
You, L. and Daigler, R. (2010). The Strength and Source of Asymmetric International Diversification. Journal of Economics and Finance, 34 (3), 349–64.
Yu, I.-W., Fung, K.-P. and Tam, C.-S. (2010). Assessing Financial Market Integration in Asia — Equity Markets. Journal of Banking & Finance, 34 (12), 2874–85.
Zakoian, J. M. (1994). Threshold Heteroskedastic Models. Journal of Economic Dynamics and Control, 18 (5), 931–55.
Editor information
Editors and Affiliations
Copyright information
© 2013 Jacek Niklewski and Timothy Rodgers
About this chapter
Cite this chapter
Niklewski, J., Rodgers, T. (2013). International Portfolio Diversification and the 2007 Financial Crisis. In: Batten, J.A., MacKay, P., Wagner, N. (eds) Advances in Financial Risk Management. Palgrave Macmillan, London. https://doi.org/10.1057/9781137025098_10
Download citation
DOI: https://doi.org/10.1057/9781137025098_10
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-43874-7
Online ISBN: 978-1-137-02509-8
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)