International Portfolio Diversification and Market Linkages in the Presence of Regime-Switching Volatility
35 Pages Posted: 10 Aug 2006
Date Written: June 2006
We examine if the benefits of international portfolio diversification are robust to time-varying asset return volatility. Since diversified portfolios are subject to common cross-country shocks, we focus on the transmission mechanism of such shocks in the presence of regime-switching volatility. We find little evidence of increased market interdependence in turbulent periods. Furthermore, for the vast majority of time, we show that risk reduction is delivered for the US investor who holds foreign equity.
Keywords: Market comovement, International portfolio diversification, Financial market crises,regime switcing
JEL Classification: F42, G15, C32
Suggested Citation: Suggested Citation