The impact of country and industry diversification on equity portfolios

Date: 6 June 2014

Venue: Rockox House - Keizerstraat 10 - 2000 Antwerp

PhD candidate: Fan Wu

Principal investigator: Prof A. Claes

Co-principal investigator: Prof M. De Ceuster

Short description: PhD defense Fan Wu - Faculty of Applied Economics University of Antwerp and Faculté ESPO Université Saint-Louis Bruxelles

Abstract: This thesis is dedicated to country and industry effects in international portfolios. The first part – Country and Industry Effects in International Equity Portfolios – provides a literature review and two empirical applications. A literature review on momentum effects in diversified portfolios together with two empirical applications is shown in the second part, titled Country and Industry Effects in Momentum Strategies.

Previous research showed the impact of country diversification declined in favor of the industry diversification in developed countries, whereas the country effect was found to remain important for emerging countries. In our first empirical work we focus on the BRIC countries, the most important emerging markets using individual stock returns. Using a variance-based approach we show that the country effect is more important than the industry effect. Our second application extends the methodology to a variance-covariance framework and the data to sub-industry indices all around the world. Here spanning tests reveal that adding industry diversified portfolios to country-based portfolios improve the portfolio's efficiency.

In part two we test the dominance of country and industry momentum profits using a stochastic dominance test. Since we have a relatively small dataset, we improve the existing methodology by introducing a circular block bootstrap approach to the stochastic dominance test and show it outperforms the subsampling approach. Finally, the three momentum strategies (Jegadeesh and Titman, 52-Week High and the Intermediate Term momentum) are tested on a European dataset of sub-industry indices. The results document the outperformance of JT momentum. Moreover, momentum profits based on the most granular sub-industry data, but within aggregated country and sub-sector portfolios, momentum profits disappear.