Time-varying integration and international diversification strategies

This paper investigates the impact of globalization and integration on the relative benefits of country and industry diversification. Unlike previous models, our factor model allows asset exposures to vary with both structural changes and temporary fluctuations in theeconomic and financial environment. First, we find that globalization and integration have lead to a gradual convergence of country to industry betas, especially in Europe. Second, not accounting for time-varying factor exposures leads to substantial biases in measuresof country and industry risk. Third, even though the edge has structurally decreased, geographical diversification continues being superior to industry diversification.