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Market segmentation and international diversification across country and industry portfolios

Umutlu, Mehmet; Yargı, Seher Gören; Zaremba, Adam


Seher Gören Yargı

Adam Zaremba


We conjecture that partially segmented stock indexes that are characterized by low correlation with the world market are mainly priced by local factors and should produce abnormal returns relative to a global asset-pricing model. This implies a negative relation between correlation and future index returns in the presence of segmented indexes. Empirical evidence confirms such a relationship for the sample of industry indexes, suggesting a heterogeneous segmentation. However, we do not observe a similar pattern for country indexes. In addition, the international diversification potential of industries does not vanish during volatile periods. The hypothesis that the negative relationship should be stronger for the more segmented subsamples that are characterized by small market size and emerging country origin is verified for the industry sample. Thus, cross-industry diversification is superior to mere cross-country diversification.

Journal Article Type Article
Acceptance Date Mar 30, 2023
Online Publication Date Apr 13, 2023
Publication Date 2023-04
Deposit Date May 12, 2023
Publicly Available Date Oct 14, 2024
Journal Research in International Business and Finance
Print ISSN 0275-5319
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 65
Article Number 101954
Keywords International portfolio diversification; Industry diversification; Country diversification; Partial segmentation and integration; Index return correlations