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Brooks, Robin
Del Negro, Marco
Year of Publication: 
Series/Report no.: 
Working Paper No. 2002-20a
Federal Reserve Bank of Atlanta, Atlanta, GA
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
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Working Paper

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