A Study On The Benefits And Risks Of International Diversification Of Chinese Investors' Financial Assets

This paper uses historical monthly indices of 16 major stock markets from January 1995 to December 2010. Firstly, it investigates the linking of every stock market by quantitative methods include cointegration test and pulse response function. Empirical test shows most stock markets are the cause-effect relationship with China's but are not the Granger causality of China's stock market. VAR model test indicates China's stock market and World's stock market don't have a steady equilibrium relationship in the long run. China's market is consistent with the impact of the principal stock markets, but Emerging Market Countries are complex through the IRF model. It illustrate China's stock market is weakly consistent with World's which is useful to establish overseas investments to spread risk and improve income.Secondly, this paper examines the potential gains of international portfolio diversification from the perspective of Chinese investors based on the Markowitz mean-variance model. The empirical findings in the paper reveal that, there are substantial gains from international diversification for Chinese investors as opposed to purely domestic Chinese stock investment. All international efficient portfolios are superior to the purely Chinese domestic portfolio if measured by the risk-adjusted return.Finally, the paper analyses international diversification investments from systematic risk and unsystematic risk. It explains the reason of risk and introduces strategies on how to avoid the risk.