The harmonization of fiscal and economic policy within the European Monetary Union (EMU) has had a considerable impact on the economies of member countries. In particular, several studies indicate that the proceeding economic integration among euro area countries has important consequences for the factors driving asset returns in financial markets. However, these studies rely on one specific methodology [Heston, S.L., Rouwenhorst, K.G., 1994. Does industrial structure explain the benefits of international diversification? Journal of Financial Economics 36, 3-27; Heston, S.L., Rouwenhorst, K.G., 1995. Industry and country effects in international stock returns. Journal of Portfolio Management Spring, 53-58], that has recently been criticized as too restrictive. This study adopts a mean-variance approach instead. Using recent euro area stock markets data, we find strong evidence that diversification over industries yields more efficient portfolios than diversification over countries.

Country factors, EMU, Euro area stock markets, European integration process, Industry factors, Portfolio diversification
dx.doi.org/10.1016/j.jimonfin.2008.05.005, hdl.handle.net/1765/62887
Journal of International Money and Finance: theoretical and empirical research in international economics and finance
Rotterdam School of Management (RSM), Erasmus University

Moerman, G.A. (2008). Diversification in euro area stock markets: Country versus industry. Journal of International Money and Finance: theoretical and empirical research in international economics and finance, 27(7), 1122–1134. doi:10.1016/j.jimonfin.2008.05.005