International Portfolio and Emerging Market: Diversification and Consequence

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ACKNOWLEDGEMENT

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DECLARATION

I, (Your name), would like to declare that all contents included in this thesis/dissertation stand for my individual work without any aid, & this thesis/dissertation has not been submitted for any examination at academic as well as professional level previously. It is also representing my very own views & not essentially which are associated with university.

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Table of Contents

ACKNOWLEDGEMENTii

DECLARATIONiii

Background of the Study5

Literature Review7

Methodology9

Data Sources12

Work Plan14

REFERENCES15

Background of the Study

International portfolio diversification has been adopted by investors as an effective tool to improve the performance of their portfolios. It allows significant gains by allocating a portion of the portfolio assets to foreign and secondary markets to reduce its total risk. These benefits are the result of low correlations between the various national markets between the individual securities of a same market. Indeed, the gains from international diversification are a function of the interdependence of national markets. When these correlations were these high gains will be low or even nonexistent. However, when correlations between national markets are small gains are important.

Recently, the emphasis of the phenomena of deregulation and liberalization capital markets has led to a strong integration of economies around the world. Thus, the indices of national markets have become increasingly correlated them. This could only reduce the benefits of international diversification. In this context, there is a decrease in the interest of international diversification on developed markets because of their strong integration which pushes investors to move to emerging markets because of their high growth potential and their segmentation both among themselves and with developed markets. The aim of this paper is therefore to measure the integration of financial markets in the way of international portfolio diversification.

It is expected that market integration measured empirically will judge whether it is possible to gain international diversification or not, that is to say, if markets are integrated, then the potential gains will be small. In contrast, if markets are segmented so international diversification is important. We then seeks to answer the question: What is the impact of increased level of integration of emerging financial markets in developed markets on potential gains from international diversification, so this study will be a significant contribution the Existing literature. 

Literature Review

The benefits of international diversification are often attributed to weak correlations between national financial markets between individual titles in the same market. However, in recent years financial markets have undergone major reforms. The main motivation is to move towards more open markets. These reforms have led to radical changes in the financial and began the process financial integration. Such phenomena have led to the approximation of overall behaviour of the markets. This resulted in an increase in correlations them as well as more volatile assets. This should be taken into account when developing management strategies portfolio ...