International portfolio diversification: An ICAPM approach with currency risk

Dimitriou, Dimitrios and Simos, Theodore (2012): International portfolio diversification: An ICAPM approach with currency risk. Published in: Macroeconomics and Finance in Emerging Market Economies (8 November 2012): pp. 1-13.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: international markets; market integration; financial crises; MGARCH specification
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

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