Portfolio diversification and international stock market structure: an empirical study.

Summary The first part is devoted to the principle of portfolio diversification in an international context and to the integration of international financial markets. In chapter 1, it is shown that the variance of a portfolio can be substantially reduced by a diversification strategy, which makes it possible to reduce the non-systematic portion of the risk. The reduction of the variance is all the more important as the correlation coefficients between the selected securities are low. In the second chapter, it is empirically proven that international diversification is more efficient than domestic diversification, because of the low degree of correlation between markets. However, it involves an additional risk related to the variations of the exchange rates of the countries where the investments are made. The impact of currency risk on the risk of an international portfolio is measured in Chapter 3. The possibilities of eliminating currency risk, by hedging or by splitting, are also discussed, and the concept of global risk (market risk plus currency risk) is introduced. We conclude that the reduction of global risk by international portfolio diversification cannot be quantified, because of the difficulty in defining international systemic risk. International systemic risk can only be defined in an integrated market. It is therefore necessary to prove that the markets are integrated in order to measure the reduction of the non-systemic risk of an international portfolio.