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International Portfolio Diversification and Market Linkages in the presence of regime-switching volatility

Thomas Flavin and Ekaterini Panopoulou

  • IIIS Discussion Paper No. 167 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 switching.
    JEL Classification: F42; G15; C32

Last updated 28 August 2014 by IIIS (Email).