Euro-zone equity returns: country versus industry effects

This paper investigates whether Euro-zone equity returns are driven by country or industry effects over the 1990 to 2008 period. Using a style analysis approach, we find that before the introduction of the Euro country effects dominate, while industry effects prevail after 1999. This reversal at the aggregate level is driven mainly by countries that were least integrated in the EMU and world markets prior to the Euro launch. For markets with stronger economic linkages, such as Germany and France, industry effects dominate both in the nine years before and in the nine years after the introduction of the Euro

International portfolio diversification: currency, industry and country effects revisited

We examine the relative importance of country, industry, world market and currency risk factors for international stock returns. Our approach focuses on testing the mean-variance efficiency of the various factor portfolios. An unconditional analysis does not detect significant differences between country, industry and world portfolios, nor any role for currency risk factors. However, when we allow expected returns, volatilities and correlations to vary over time, we find that equity returns are mainly driven by global industry and currency risk factors. We propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets

International Diversification in the Euro-Zone: The Increasing Riskiness of Industry Portfolios

We investigate, from a portfolio performance perspective, the relative importance of country and industry factors as determinants of international equity returns in the Euro-zone over the 1990 to 2003 period. Although industry- and country-based portfolios are indistinguishable in terms of mean-variance efficiency and Sharpe ratios, we document remarkable changes in the structure of Euro-zone equity returns. Whereas country returns were more volatile but less correlated than industry returns in the early nineties, the opposite is true for the late 90s and the beginning of the 21st century. After the launch of the Euro, the fraction of Euro-wide industry risk unrelated to country factors nearly doubles. This striking increase in industry idiosyncratic risk suggests that cross-border diversification within a single Euro-zone industry fails to deliver the full benefits of international diversification. Indeed, it has caused a near doubling of the average annual gains from Euro-wide cross-industry diversification, from 5.2% p.a. in the convergence period to 9.7% in the Euro period. We argue that the increasing importance of industry factors may be related to the enhanced economic integration of Eurozone countries induced by the EMU convergence process.