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The impact of financial crises on international diversification
Journal article   Peer reviewed

The impact of financial crises on international diversification

R.G. Schwebach, J.P Olienyk and J.K. Zumwalt
Global Finance Journal, Vol.13(2), pp.147-161
2002
DOI: https://doi.org/10.1016/S1044-0283(02)00050-9
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Abstract

Benefits from international diversification are well documented; low correlations between domestic and foreign securities allow for the construction of portfolios with improved return/risk characteristics. However, recent evidence indicates that correlations among international security markets are related to these markets' volatility, thus reducing the efficacy of international diversification at the time it is needed most. The turmoil in capital markets following the recent Asian financial crisis provides a vivid illustration of these phenomena. An examination of the correlations and volatility of 11 foreign markets reveals that potential diversification benefits changed dramatically for the period following the devaluation of the baht by Thailand in July 1997. Specifically, both the correlations among 11 country indices and their volatilities increased substantially following the July devaluation. Interestingly, index funds, represented by World Equity Benchmark Shares (WEBS), dominated closed-end country funds prior to the devaluation, but were dominated by the closed-end funds (CEFs) subsequent to the devaluation.

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