Does industrial structure explain the benefits of international diversification?

Heston, Steven L.; Rouwenhorst, K. Geert

doi:10.1016/0304-405x(94)90028-0

Cited by 622 publications

(556 citation statements)

References 11 publications

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“…Ghosh and Wolf (1997) carry out this exercise for U.S. states. Methodologically related is a study by Heston and Rouwenhorst (1994), who use this decomposition for stock market ‡uctuations. These studies focus on the qualitative distinction between country shocks and industry shocks, but not on the quantitative risk measures, which is the object we pursue in our analysis.…”

Section: Related Empirical Applicationsmentioning

confidence: 99%

Volatility and Development

Koren

Tenreyro

2007

The Quarterly Journal of Economics

458

361

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Why is GDP growth so much more volatile in poor countries than in rich ones? We identify four possible reasons: (i) poor countries specialize in more volatile sectors; (ii) poor countries specialize in fewer sectors; (iii) poor countries experience more frequent and more severe aggregate shocks (e.g. from macroeconomic policy); and (iv) poor countries' macroeconomic fluctuations are more highly correlated with the shocks of the sectors they specialize in. We show how to decompose volatility into these four sources, quantify their contribution to aggregate volatility, and study how they relate to the stage of development. We document the following regularities. First, as countries develop, their productive structure moves from more volatile to less volatile sectors. Second, the level of specialization declines with development at early stages, and slowly increases at later stages of development. Third, the volatility of country-specific macroeconomic shocks falls with development. Fourth, the covariance between sector-specific and country-specific shocks does not vary systematically with the level of development. We argue that many theories linking volatility and development are not consistent with these findings and suggest new directions for future theoretical work.

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Section: Related Empirical Applicationsmentioning

confidence: 99%

Volatility and Development

Koren

Tenreyro

2007

The Quarterly Journal of Economics

458

361

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“…Firstly, the industry and firm factors are estimated across the sample countries using the existing models (for example Rumelt, 1991;McGahan and Porter, 1997;Bmsh, Bromiley and Hendrickx, 1999). Roll (1992) and Heston and Rouwenhorst (1994) find that differences in industry structures across countries have an influence on firm profitability. Systematic differences between industry and firm effects across countries would imply that significant country differences exist.…”

Section: Modeling Performance Determinantsmentioning

confidence: 99%

The home country in the age of globalization: how much does it matter for firm performance?

Hawawini

Subramanian

Verdin

2004

Journal of World Business

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The globalization process has created considerable speculation on the impact of the home country environment to a firm's competitive advantage in international markets. Using a random effects model that is partly induced from the concept of comparative advantage and partly following the descriptive modeling of performance determinants, this paper explores the quantitative impact of home country environment on the performance for firms across 6 countries. The paper uses two value based, i.e. risk adjusted and cash-flow based, measures of firm performance. The results indicate that the importance of country factors is low and firm-specific factors dominate performance across and within countries. The results also show that global industry effects are increasingly more important than country effects.

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“…In addition, we consider as benchmark models the world Capital Asset Pricing Model that includes the world market return and the International CAPM that includes and several currency returns as well. A common approach for comparing country and industry effects is based on a factor model with country and industry dummy variables (Heston and Rouwenhorst, 1994;Griffin and Karolyi, 1998). This model assumes a unit exposure to the global market shock for all assets, which may lead to biases in comparing country and industry factors (Baele and Inghelbrecht, 2007;Bekaert et al 2008).…”

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confidence: 99%

International portfolio diversification: Currency, industry and country effects revisited

Eiling

Gérard

Hillion

et al. 2012

Journal of International Money and Finance

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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.JEL classification: G11, G15

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Does industrial structure explain the benefits of international diversification?

Cited by 622 publications

References 11 publications

Volatility and Development

Volatility and Development

The home country in the age of globalization: how much does it matter for firm performance?

International portfolio diversification: Currency, industry and country effects revisited

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