DOES INDUSTRIAL-STRUCTURE EXPLAIN THE BENEFITS OF INTERNATIONAL DIVERSIFICATION

We examine the influence of industrial structure on the cross-sectiona l volatility and correlation structure of country index returns for 12 European countries between 1978 and 1992. We find that industrial str ucture explains very little of the cross-sectional difference in count ry return volatility, and that the low correlation between country ind ices is almost completely due to country-specific sources of return va riation. Diversification across countries within an industry is a much more effective tool for risk reduction than industry diversification within a country.