International diversification and global credit risk: a methodology for portfolio building

Abstract

credi risk and portfolio diversification

Credit risk has recently been identified as a cause of declining international diversification capacity; in this paper we offer an alternative methodology to create an equity portfolio with exposure to global credit risk and controlled market risk. Following the factor decomposition methodology, we reduce a sample of the biggest international companies to a portfolio composed by just 11 stocks, representing different risk factors, which show high diversification in terms of systematic risk and a risk-return binomial comparable to benchmark international equity indices