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Brooks, Robin
Del Negro, Marco
Year of Publication: 
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 2002-20a
An empirical regularity in the portfolio diversification literature is the importance of country effects in explaining international return variation. We develop a new decomposition that disaggregates these country effects into region effects and within-region country effects. We find that half the return variation typically attributed to country effects is actually due to region effects, a result robust across developed and emerging markets, with the remaining variation explained by within-region country effects. For the average investor, this means that diversifying across countries within Europe, for example, delivers half the risk reduction possible from diversifying across regions globally.
Financial markets
Document Type: 
Working Paper

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