Mean-Variance Convergence around the World

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  • 1 January 2006
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      • Published in RePEc
Abstract
In this paper, we show (i) that the risk-return characteristics of our sample of 17 developed stock markets of the world have converged significantly toward each other during our study period 1974 - 2004, (ii) that the speed of convergence, however, varies greatly across individual markets, largely reflecting the 'initial position' of each market relative to the rest of markets in the risk-return space, and that (iii) the documented international convergence in risk-return characteristics is driven mainly by the declining 'country effect', rather than the rising 'industry effect', suggesting that the convergence is associated with international market integration. Specifically, we first compute the riskreturn distance among international stock markets based on the Euclidean distance and find that the distance thus computed has been deceasing significantly over time, implying a mean-variance convergence. In particular, the average risk-return distance has decreased by about 43% over our sample period. Lastly, we document that the risk-return characteristics of our sample of 14 emerging markets have been converging rapidly toward those of developed markets in recent years. This development notwithstanding, emerging markets still remain as a distinct asset class.
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