Financial Crisis and International Portfolio Diversification: A Principal Component Analysis Approach

摘要

The present study examines the co-movement of selected world market stock indices in order to analyze the potential gains that Indian investors can achieve when they diversify their portfolio into international markets. The sample consists of a mix of different categories of world markets such as the matured markets like the USA, Japan, and UK, emerging markets like India, Singapore, South Korea, and Thailand with an inclusion of other world markets to cover more or less all the markets of the world. We examine the co-movement using principal component analysis which is useful in terms of stability of factors and it is unlikely that factor stability can be observed over longer periods. We examine the co-movement for a period of 15 years from 2000-2015. The results here suggest that there was a different pattern in the world markets before and after the financial crisis and the best portfolio for an Indian investor is Germany, Malaysia, Jakarta, Mexico, and Israel would appropriate.