To diversify or not to diversify internationally?

Abstract

Using alternative measures of return correlations we show that neither industry nor country correlations exhibit an ever-increasing trend. Instead correlations jump during recessions with a tendency to revert in stable periods. This keeps international diversification still important despite the financial integration that might have increased correlations permanently. Moreover the mean of industry correlations is statistically lower than that of country correlations sug-gesting that cross-industry diversification is more efficient. Finally diversifying through in-dustries of emerging markets rather than those of developed markets reduces mean correlations more. These results are robust to several correlation definitions.