International Portfolio Diversification: Currency, Industry and Country Effects Revisited
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Abstract
| This paper analyzes the role of currency risk, industrial structure and country factors on international diversification strategies in the G7 countries over the past 30 years. We proposes a new test of the difference in Sharpe ratios of two portfolios that allows us to compare the relative efficiency of different portfolio strategies. We find that with monthly rebalancing, industry-based managed portfolios significantly outperform country-based managed portfolios. However, this out performance critically depends on the ability to go short: with long-only constraints both strategies show a similar performance. Strikingly, currency deposits are crucial for achieving the full benefits from international portfolio strategies: under no short sale restrictions, adding managed currency deposits to either country or industry based strategies nearly doubles their Sharpe ratio. Furthermore, a style analysis reveals that including currency as style portfolios significantly improves our ability to replicate the returns of international portfolio strategies. |
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| Ingolf Dittmann |
