Comovements and Benefits of Investment Diversifications from Country and Industry Perspectives in the EU Stock Markets

• Main Authors: Hsu Hao-Cheng, 許皓程
• Other Authors: Sheng-Yung Yang
• Format: Others
• Language: zh-TW
• Published: 2012
• Online Access: http://ndltd.ncl.edu.tw/handle/07498401772749509204

博士 === 國立中興大學 === 財務金融系所 === 101 === The dissertation mainly composes of two research topics. First one is discussed in the chapter II titled “International comovement of European country and industry stock markets”. The other is presented in the chapter III titled “Benefits of diversifying investments in the European area stock markets: Country versus industry perspective”. Chapter II examines the extent to which country and industry equity markets have become more integrated within European equity markets, simultaneously accounting for long-term and short-term perspectives. Johansen’s method is used to provide evidence of common trends in both country and industry equity indices, implying that, in the long run, there is little to be gained from diversifying portfolios within this region. In addition, integration is empirically measured by determining the dynamic conditional correlation (DCC) between each market using a DCC GARCH model. The evolution of these correlations is then tracked over time using a smooth transition model, showing not only when greater integration occurred but also how quickly these correlations moved to their new levels. The results indicate that the degree of co-movement increases for equity returns between countries as well as industries. Stock market integration among EU member states and participants in the European area is negatively correlated with foreign exchange risk, with results showing significantly higher country and industry correlations among eurozone members than among non-euro countries. Using weekly data from 1991/10/16 to 2012/3/14, the chapter III offers some policy implications for the investors and risk managers allocating their funds to foreign assets inside the European Union. Comparing different investment strategies, the empirical results shows that dynamic portfolios have substantially higher mean Sharpe ratios than static portfolios in the European stock markets. DCC GARCH models help in estimating the correlation dynamics precisely, and resulting in better investment strategies and providing superior reward-to-risk ratio to investors.In addition, to investigate the debate on whether country or industry portfolios provides better diversifications effects, this dissertation splits the whole period into two relevant subsamples by Euro Introduction：the pre-Euro period (1991/10/16-1998/12/31) and the post-Euro period (1999/1/1-2012/3/14). The results show that sector indices provide significantly greater diversification opportunities than do country indices. These results clarify the question：Whether actively pursuing geographical or industrial diversification do add diversification opportunities? Theoretically, accurate estimation of the correlation dynamics of equities in weekly-rebalanced portfolios results in improved performance over portfolios rebalanced at lower frequencies (i.e., monthly or quarterly). However, frequent rebalancing of portfolios among different assets increases turnover, incurring additional transaction costs. To provide a more direct evaluation the influences of rebalancing frequency on dynamic asset allocation performance, the study was repeated with monthly and quarterly time horizons, with results show that dynamic country and industry portfolios strategies provide values from conditional information.