A factor analysis of international portfolio diversification

Title
A factor analysis of international portfolio diversification
Publication Date
2008
Author(s)
Valadkhani, Abbas
Chancharat, Surachai
Harvie, Charles
Type of document
Journal Article
Language
en
Entity Type
Publication
Publisher
Emerald Publishing Limited
Place of publication
United Kingdom
DOI
10.1108/10867370810894693
UNE publication id
une:13751
Abstract
Purpose - 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. Practical implications - 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. Originality/value - Very few previous studies have investigated the benefits from portfolio diversification by using the PC and ML methods.
Link
Citation
Studies in Economics and Finance, 25(3), p. 165-174
ISSN
1755-6791
1086-7376
Start page
165
End page
174

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