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A factor analysis of international portfolio diversification

Journal Article


Abstract


  • The purpose of this paper is to investigate the relationships between stock market returns

    of 13 countries based upon monthly data spanning December 1987 to April 2007.

    Design/methodology/approach - Specifically, the principal component (PC) and maximum

    likelihood (ML) methods are used to examine any discernable patterns of stock market co-movements.

    Findings - Factor analysis provides evidence that stock returns in a number of Asian countries are

    highly correlated and, based on the resulting robust factor loadings, they form the first well-defined

    common factor. The paper also finds consistent results (based on both the PC and ML methods)

    suggesting that the stock market returns of developed countries are also highly correlated, and

    constitute our second factor. The paper concludes that, inter alia, geographical proximity and the level

    of economic development do matter when it comes to co-movements of stock returns and that this has

    important implications for financial portfolio diversification if the aim is to reduce systematic risks

    across countries. Very few previous studies have investigated the benefits from portfolio

    diversification by using the PC and ML methods.

UOW Authors


  •   Valadkhani, Abbas (external author)
  •   Chancharat, Surachai (external author)
  •   Harvie, Charles

Publication Date


  • 2008

Citation


  • Valadkhani, A., Chancharat, S. & Harvie, C. (2008). A factor analysis of international portfolio diversification. Studies in Economics and Finance, 25 (3), 165-174.

Scopus Eid


  • 2-s2.0-57749202896

Ro Metadata Url


  • http://ro.uow.edu.au/commpapers/1857

Number Of Pages


  • 9

Start Page


  • 165

End Page


  • 174

Volume


  • 25

Issue


  • 3

Place Of Publication


  • http://info.emeraldinsight.com/products/journals/journals.htm?PHPSESSID=78na9ddgubcqjuebpm1psdhkq7&id=sef

Abstract


  • The purpose of this paper is to investigate the relationships between stock market returns

    of 13 countries based upon monthly data spanning December 1987 to April 2007.

    Design/methodology/approach - Specifically, the principal component (PC) and maximum

    likelihood (ML) methods are used to examine any discernable patterns of stock market co-movements.

    Findings - Factor analysis provides evidence that stock returns in a number of Asian countries are

    highly correlated and, based on the resulting robust factor loadings, they form the first well-defined

    common factor. The paper also finds consistent results (based on both the PC and ML methods)

    suggesting that the stock market returns of developed countries are also highly correlated, and

    constitute our second factor. The paper concludes that, inter alia, geographical proximity and the level

    of economic development do matter when it comes to co-movements of stock returns and that this has

    important implications for financial portfolio diversification if the aim is to reduce systematic risks

    across countries. Very few previous studies have investigated the benefits from portfolio

    diversification by using the PC and ML methods.

UOW Authors


  •   Valadkhani, Abbas (external author)
  •   Chancharat, Surachai (external author)
  •   Harvie, Charles

Publication Date


  • 2008

Citation


  • Valadkhani, A., Chancharat, S. & Harvie, C. (2008). A factor analysis of international portfolio diversification. Studies in Economics and Finance, 25 (3), 165-174.

Scopus Eid


  • 2-s2.0-57749202896

Ro Metadata Url


  • http://ro.uow.edu.au/commpapers/1857

Number Of Pages


  • 9

Start Page


  • 165

End Page


  • 174

Volume


  • 25

Issue


  • 3

Place Of Publication


  • http://info.emeraldinsight.com/products/journals/journals.htm?PHPSESSID=78na9ddgubcqjuebpm1psdhkq7&id=sef