HAVE EXPECTED BENEFITS FROM WORLD MARKET DIVERSIFICATION DECREASED IN RECENT YEARS? EVIDENCE FROM A CONDITIONAL ICAPM WITH ASYMMETRIC EFFECTS

This paper tests a conditional International Capital Asset Pricing Model (ICAPM) using an asymmetric multivariate GARCH specification, and explores the dynamics of expected benefits from international portfolio diversification. The evidence supports the conditional ICAPM and financial integration hypothesis and shows that investors from all countries could expect statistically significant gains from the world portfolio diversification. However, these gains are considerably larger for investors with smaller home markets. Interestingly, there is only a slight tendency for expected gains from world diversification to decrease over time, in response to changing market conditions.