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Diversification revisited

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Author Info

  • Kemper, Kris
  • Lee, Allissa
  • Simkins, Betty J.
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    Abstract

    Many investment companies hold diversified asset portfolios and frequently try to mirror or outperform a market index for each asset class such as stocks and bonds. As Wibaut and Wilford (2009) show, often the same issuers appear in each of those indices and this may lead to undesirable results such as during a crisis period. Our research further explores the topic of diversification with a special focus on the financial crisis period of 2007 through 2009. Our results indicate that there is benefit in terms of correlations from holding bond and stock portfolios. Interestingly, these findings show the benefit is most pronounced during times of market stress.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0275531911000614
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    Bibliographic Info

    Article provided by Elsevier in its journal Research in International Business and Finance.

    Volume (Year): 26 (2012)
    Issue (Month): 2 ()
    Pages: 304-316

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    Handle: RePEc:eee:riibaf:v:26:y:2012:i:2:p:304-316

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    Web page: http://www.elsevier.com/locate/ribaf

    Related research

    Keywords: Investments; Financial crisis; Diversification; Asset correlation;

    References

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    1. John Y. Campbell & John Ammer, 1991. "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," NBER Working Papers 3760, National Bureau of Economic Research, Inc.
    2. Connolly, Robert & Stivers, Chris & Sun, Licheng, 2005. "Stock Market Uncertainty and the Stock-Bond Return Relation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 161-194, March.
    3. Smith, Kenneth L. & Swanson, Peggy E., 2008. "The dynamics among G7 government bond and equity markets and the implications for international capital market diversification," Research in International Business and Finance, Elsevier, vol. 22(2), pages 222-245, June.
    4. Baur, Dirk G. & Lucey, Brian M., 2009. "Flights and contagion--An empirical analysis of stock-bond correlations," Journal of Financial Stability, Elsevier, vol. 5(4), pages 339-352, December.
    5. Kwan, Simon H., 1996. "Firm-specific information and the correlation between individual stocks and bonds," Journal of Financial Economics, Elsevier, vol. 40(1), pages 63-80, January.
    6. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
    7. Pástor, Luboš & Stambaugh, Robert F, 2002. "Liquidity Risk and Expected Stock Returns," CEPR Discussion Papers 3494, C.E.P.R. Discussion Papers.
    8. Banerjee, Prithviraj S. & Doran, James S. & Peterson, David R., 2007. "Implied volatility and future portfolio returns," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3183-3199, October.
    9. Huang, Mei-Yueh & Lin, Jun-Biao, 2011. "Do ETFs provide effective international diversification?," Research in International Business and Finance, Elsevier, vol. 25(3), pages 335-344, September.
    10. Inci, A. Can & Li, H.C. & McCarthy, Joseph, 2011. "Financial contagion: A local correlation analysis," Research in International Business and Finance, Elsevier, vol. 25(1), pages 11-25, January.
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