Country Betas and Potential Gains From Diversification in the European Union

Abstract

This abstract was created post-production by the JFI Editorial Board.

Finance literature has long used estimates of correlation coefficients between a pair of return series to assess the extent of risk-reduction potential by combining the two investments. This study proposes a different measure to assess the diversification potential of an equity market from international investor's point of view. This new measure is called country beta. This new measure, country beta is defined in section III above. We estimated country betas for twenty five countries in the European Union. The country beta estimates reveal that the investors in Germany and France stand to gain more by diversifying into the newer markets of EU such as Lithuania, Latvia, Slovakia and Slovenia compared to some other EU countries. The Austrian and Luxembourg markets also offer better diversification potential for the German and French investors. Another interesting finding is that the British investors will gain more if they diversify their holdings into the equity markets of Slovenia, Slovakia, and Latvia than what they could achieve by moving into Italy or Spain.