Correlation Dynamics and International Diversification Benefits
AbstractForecasting 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 InfoPaper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2013-49.
Date of creation: 07 Aug 2013
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Web page: http://www.econ.au.dk/afn/
Asset pricing; asset allocation; dynamic conditional correlation (DCC); dynamic equicorrelation (DECO);
Other versions of this item:
- Christoffersen, Peter & Errunza, Vihang & Jacobs, Kris & Jin, Xisong, 2014. "Correlation dynamics and international diversification benefits," International Journal of Forecasting, Elsevier, vol. 30(3), pages 807-824.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-29 (All new papers)
- NEP-CFN-2013-12-29 (Corporate Finance)
- NEP-FMK-2013-12-29 (Financial Markets)
- NEP-FOR-2013-12-29 (Forecasting)
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