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Correlation Dynamics and International Diversification Benefits

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  • Peter Christoffersen

    ()
    (University of Toronto)

  • Vihang R. Errunza

    ()
    (McGill University)

  • Kris Jacobs

    ()
    (University of Houston)

  • Xisong Jin

    ()
    (University of Luxembourg)

Abstract

Forecasting the evolution of security co-movements is critical for asset pricing and portfolio allocation. Hence, we investigate patterns and trends in correlations over time using weekly returns for developed markets (DMs) and emerging markets (EMs) during the period 1973-2012. We show that it is possible to model co-movements for many countries simultaneously using BEKK, DCC, and DECO models. Empirically, we ?find that correlations have significantly trended upward for both DMs and EMs. Based on a time-varying measure of diversification benefit, we ?find that it is not possible in a long-only portfolio to circumvent the increasing correlations by adjusting the portfolio weights over time. However, we do find some evidence that adding EMs to a DM-only portfolio increases diversification benefits.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2013-49.

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Length: 35
Date of creation: 07 Aug 2013
Date of revision:
Handle: RePEc:aah:create:2013-49

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Asset pricing; asset allocation; dynamic conditional correlation (DCC); dynamic equicorrelation (DECO);

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