Download or read book International Diversification Using Cointegration and Modern Portfolio Theory written by Jose Balarezo and published by . This book was released on 2010 with total page 116 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is widely accepted that diversifying internationally is a sound strategy because correlations among securities in different countries are lower as compared to local securities. We argue however, that in some instances, diversifying internationally might not be as effective; therefore, investors need to be careful in choosing where to diversify internationally. For investors with longer time horizons, if countries share common long term movements, the benefits of international diversification will be diminished. We argue that international diversification will benefit investors only in the cases that the home country does not cointegrate with the foreign market. To verify this argument, this paper uses cointegration techniques to investigate long term movements between The U.S. and 15 foreign markets, and then uses country ETFs (Exchange Traded Funds) to build portfolios constructed by combining the findings of the cointegration techniques with Modern Portfolio Theory (MPT) and compares the results against portfolios built solely on MPT. The results clearly support our hypothesis as in more than 90% of the cases tested, the portfolios constructed by combining the findings of our cointegration analysis with the optimization techniques of MPT outperform - in a risk adjusted basis - portfolios constructed only by using the optimization techniques used by MPT.