Selection of stock markets: a factor analysis approach. (22nd January 2010)

• Record Type: Journal Article
• Authors: Hui, Tak Kee; Tsui, Kai Chong; Chua, David
• Is Part Of: International journal of applied management science. Volume 2:Number 2(2010)
• Page Start: 136
• Page End: 151
• Publication Date: 2010-01-22
• Subjects: international portfolio diversification -- factor analysis -- return per unit risk -- optimal portfolios -- dividends -- stock markets -- stock exchanges -- USA -- United States -- Asia-Pacific -- sub-periods -- pre-crisis periods -- post-crisis periods -- portfolio selection -- country weights -- Australia -- Hong Kong -- Indonesia -- Japan -- Korea -- New Zealand -- Malaysia -- Philippines -- Singapore -- Taiwan -- Thailand -- applied management science; Management science -- Periodicals; 658
• Languages: English
• ISSNs: 1755-8913

Abstract

This study uses factor analysis to simplify the complex relationships among stock markets and to reduce the number of markets required for portfolio construction. Our sample consists of the US and 11 Asia-Pacific stock markets. We find that the reduced portfolio obtained from factor analysis has the same return per unit risk as that constructed with all 12 stock markets. Sub-periods, pre-crisis and post-crisis periods are also examined. Comparisons of optimal portfolios reveal that the exclusion of dividends understates the benefits of diversification and has an influence on optimum portfolio selection and country weights.