To the author's knowledge no other studies have dealt with the effect of international diversification on stock market monthly seasonality. The aim of this study is to investigate this effect in various ways: stock market monthly seasonality is analyzed by incorporating exchange rates and trading costs in international portfolio returns. The variance of the world portfolio is decomposed into six components. Stochastic dominance approach is used to show the robustness of the results. Five trading strategies are compared to help international investors be more informed. All the results show that monthly seasonality is clearly present in an economic sense and robust. Particularly, when exchange rates are incorporated into portfolio returns. January has the highest return and the lowest risk in the world portfolio. Copyright Blackwell Publishers Ltd 1998.
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