Title: Selection of stock markets: a factor analysis approach

Authors: Tak Kee Hui, Kai Chong Tsui, David Chua

Addresses: Department of Decision Sciences, NUS Business School, National University of Singapore, 1 Business Link, 117592, Singapore. ' School of Business, SIM University, 461 Clementi Road, 599491, Singapore. ' Department of Decision Sciences, NUS Business School, National University of Singapore, 1 Business Link, 117592, Singapore

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.

Keywords: 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.

DOI: 10.1504/IJAMS.2010.031083

International Journal of Applied Management Science, 2010 Vol.2 No.2, pp.136 - 151

Published online: 20 Jan 2010 *

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