International Portfolio Diversification: An ICAPM Approach with Currency Risk

Macroeconomics and Finance in Emerging Market Economies 2012, pp. 1-13

Advanced Risk & Portfolio Management Paper

Posted: 12 Nov 2012

See all articles by Dimitrios I. Dimitriou

Dimitrios I. Dimitriou

University of Ioannina - Department of Economics; National and Kapodistrian University of Athens

Theodore Simos

University of Ioannina - Department of Economics

Date Written: November 08, 2012

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.

Keywords: international markets, market integration, financial crises, MGARCHM specification

JEL Classification: F36, C52, G15

Suggested Citation

Dimitriou, Dimitrios I. and Dimitriou, Dimitrios I. and Simos, Theodore, International Portfolio Diversification: An ICAPM Approach with Currency Risk (November 08, 2012). Macroeconomics and Finance in Emerging Market Economies 2012, pp. 1-13, Advanced Risk & Portfolio Management Paper, Available at SSRN: https://ssrn.com/abstract=2173749

Dimitrios I. Dimitriou (Contact Author)

University of Ioannina - Department of Economics ( email )

45110 Ioannina
Greece

National and Kapodistrian University of Athens ( email )

Department of Economics
Athens
Greece

Theodore Simos

University of Ioannina - Department of Economics ( email )

45110 Ioannina
Greece

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