The Impact of Increasing Stock Market Integration on Expected Gains from International Portfolio Diversification: Evidence from a Multivariate Approach with Time Varying Risk.

This paper tests a conditional International Asset Pricing Model (ICAPM) using an asymmetric multivariate GARCH specification and investigates evolutions of ex ante benefits from world market diversification. The model is estimated simultaneously for 8 markets: the world market, 4 developed markets and 3 emerging markets. This approach allows to the price of market risk, betas and correlations to vary through time. The evidence supports the financial integration hypothesis and suggests that investors from all countries could expect statistically significant benefits from international diversification but that gains are considerably larger for investors with smaller home markets