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Is the Potential for International Diversification Disappearing?

Author

Listed:
  • Christoffersen, Peter

    (University of Toronto and Copenhagen Business School)

  • Errunza, Vihang

    (McGill University)

  • Jacobs, Kris

    (University of Houston and McGill University)

  • Jin, Xisong

    (McGill University)

Abstract

Quantifying the evolution of security co-movements is critical for asset pricing and portfolio allocation, and so we investigate patterns and trends in correlations and tail dependence over time using weekly returns for developed markets (DMs) and emerging markets (EMs) during the period 1973-2009. We use the DECO, DCC, and BEKK correlation models, and develop a novel dynamic t-copula to allow for dynamic tail dependence. We show that it is possible to characterize co-movements for many countries simultaneously. Correlations have significantly trended upward for both DMs and EMs, but correlations between EMs are lower than between DMs. Further, our evidence clearly contradicts the decoupling hypothesis. The tail dependence has also increased for both EMs and DMs, but its level is still very low for EMs as compared to DMs. Thus, while our correlation analysis suggests that the diversification potential of EMs has reduced over time, the tail dependence analysis suggests that EMs offer diversification benefits during large market moves.

Suggested Citation

  • Christoffersen, Peter & Errunza, Vihang & Jacobs, Kris & Jin, Xisong, 2010. "Is the Potential for International Diversification Disappearing?," Working Papers 11-20, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:11-20
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    File URL: http://fic.wharton.upenn.edu/fic/papers/11/11-20.pdf
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    Cited by:

    1. Chia, Rui Ming Daryl & Lim, Kai Jie Shawn, 2012. "The Attenuation of Idiosyncratic Risk under Alternative Portfolio Weighting Strategies: Recent Evidence from the UK Equity Market," MPRA Paper 41455, University Library of Munich, Germany.
    2. Eric Benhamou & David Saltiel & Sandrine Ungari & Abhishek Mukhopadhyay, 2020. "Bridging the gap between Markowitz planning and deep reinforcement learning," Papers 2010.09108, arXiv.org.
    3. Apergis, Nicholas & Christou, Christina & Miller, Stephen M., 2014. "Country and industry convergence of equity markets: International evidence from club convergence and clustering," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 36-58.
    4. Philipp J. Kremer & Andreea Talmaciu & Sandra Paterlini, 2018. "Risk minimization in multi-factor portfolios: What is the best strategy?," Annals of Operations Research, Springer, vol. 266(1), pages 255-291, July.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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