Working Paper

International stock returns and market integration: A regional perspective

Abstract: An empirical regularity in the portfolio diversification literature is the importance of country effects in explaining international return variation. We develop a new decomposition that disaggregates these country effects into region effects and within-region country effects. We find that half the return variation typically attributed to country effects is actually due to region effects, a result robust across developed and emerging markets, with the remaining variation explained by within-region country effects. For the average investor, this means that diversifying across countries within Europe, for example, delivers half the risk reduction possible from diversifying across regions globally.

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2003

Number: 2002-20