Country-Specific Risk Diversification Through International Equity Portfolios

International Journal of Financial Economics and Econometrics, Vol. 2, No. 1, pp. 57-80, 2010

Posted: 6 Nov 2010

See all articles by Fabio Pizzutilo

Fabio Pizzutilo

Università degli Studi di Bari “Aldo Moro”

Date Written: March 5, 2010

Abstract

The existence of country-specific risk factors that could be mitigated by international investments is investigated. An innovative methodology for quantifying the benefits of international diversification is also proposed and tested. In order to overcome many of the problems that arise in the study of international diversification, the analysis is restricted to the equity markets of the Eurozone. The results clearly show the benefits of international equity diversification, even in close economies. The introduction of constraints on short selling significantly reduces these benefits. For asset managers and practitioners, the analysis shows unambiguously that, despite the economic and monetary union and notwithstanding the high degree of correlation between the European markets, opportunities for diversification still exist. There is, actually, a significant country-specific source of risk that can be hedged via the use of non-domestic diversification. Most of the previous literature on this topic has adopted an U.S. perspective. Few papers assumed a European point of view. This paper fills this knowledge gap by focusing its analysis on the Eurozone markets. In contrast with previous literature, the profitability of international diversification has been verified for all countries under consideration, and not just from the standpoint of one nation alone.

Keywords: International Portfolio Diversification, Country Specific Risk, Eurozone Equity Markets, Portfolio Theory

JEL Classification: F30, G11, G15

Suggested Citation

Pizzutilo, Fabio, Country-Specific Risk Diversification Through International Equity Portfolios (March 5, 2010). International Journal of Financial Economics and Econometrics, Vol. 2, No. 1, pp. 57-80, 2010 , Available at SSRN: https://ssrn.com/abstract=1703463

Fabio Pizzutilo (Contact Author)

Università degli Studi di Bari “Aldo Moro” ( email )

largo Abbazia S. Scolastica, 53
Bari, 70124
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
539
PlumX Metrics