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Sector diversification during crises: A European perspective

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Author Info
Michel Beine (Université du Luxembourg and DULBEA, Université libre de Bruxelles, Brussels.)
Pierre-Yves Preumont
Ariane Szafarz (CEB (SBS) and DULBEA, Université libre de Bruxelles, Brussels)

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Abstract

The dynamics of the cross-correlations between the 10 Dow Jones European sector financial indices are analyzed through to the Dynamic Conditional Correlations (DCC) model during the period 1987-2003. First, the paper confirms that, on the whole, the correlations are highly volatile. Second, it brings insights on the behavior of the sector correlations during the IT bubble. The comparison of the pre- and post-bubble periods leads to the conclusion that the sector indices do not suffer from the contagion effects (a correlation increase damaging the portfolio diversification) observed by several authors on country indices. Therefore, it is argued that the benefits from sector diversification during crises must be taken into account by portfolio managers.

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Paper provided by Université libre de Bruxelles, Department of Applied Economics (DULBEA) in its series Working Papers DULBEA with number 06-07.RS.

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Length: 31 pages
Date of creation: May 2006
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Handle: RePEc:dul:wpaper:06-07rs

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Related research
Keywords: dynamic correlation; sector diversification; IT bubble; contagion;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

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