To diversify or not to diversify internationally?

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.

Automated summary

Using alternative measures of return correlations, this study finds that neither industry nor country correlations exhibit an ever-increasing trend. Instead, correlations spike during recessions and tend to revert in stable periods. The mean of industry correlations is lower than that of country correlations, suggesting that cross-industry diversification is more efficient. Furthermore, diversifying through industries in emerging markets results in lower mean correlations compared to diversifying through industries in developed markets.