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THE CONTRIBUTION OF EMERGING MARKETS TO INTERNATIONAL DIVERSIFICATION
The Contribution of Emerging Markets to International Diversification
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KAIS FADHLAOUI* PhD in Finance University of Amiens, CRIISEA-FOM
MAKRAM BELLALAH** PhD in Finance University of Amiens, CRIISEA-FOM
AMINE LAHIANI*** LEO – Université d’Orléans & ESC Rennes School of Business
elfare international allocation shows that international diversification dominates domestic diversification by the mean-variance meaning. In fact, since Grubel (1968), Levy and Sarnat (1970) and Solnik (1974), several research projects have tried to study the efficiency of international diversification strategy (Phylaktis and Ravazzolo, 2005). Such an international strategy aims to improve portfolio performance and reduce volatility. Therefore, this international diversification allows an international investor allocating a portion of his wealth to some foreign securities to mark substantial potential gains. These profits are explained by the low correlations and/or segmentation of some markets. For two decades, we have been able to notice an acceleration of the financial liberalization process. Such a process negatively affects diversification gains. The latter fact is due to an emergence of financial market integration, linked to a rise of the correlation among stock market indices. In the presence of such integration, diversification efficiency is reduced and hence, investors are attracted by domestic securities, a phenomenon called home bias. However, this financial integration does not concern all markets and therefore, some emerging markets still offer attractive diversification opportunities. This advantage is explained by their segmentation and low correlation to developed markets. Since we are interested in the market integration – segmentation relationship we shall adopt the following definitions of integration and segmentation throughout this paper. Financial integration expresses the links between capital markets. More...