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Impending Doom: The Loss of Diversification before a Crisis

Author

Listed:
  • Libin Yang

    (Department of Economics and Finance, University of Canterbury, Christchurch 8140, New Zealand)

  • William Rea

    (Department of Economics and Finance, University of Canterbury, Christchurch 8140, New Zealand)

  • Alethea Rea

    (Centre for Applied Statistics, University of Western Australia, Crawley, WA 6009, Australia)

Abstract

We present four methods of assessing the diversification potential within a stock market, and two of these are based on principal component analysis. They were applied to the Australian stock exchange for the years 2000 to 2014 and all show a consistent picture. The potential for diversification declined almost monotonically in the three years prior to the 2008 financial crisis, leaving investors poorly diversified at the onset of the Global Financial Crisis. On one of the four measures, the diversification potential declined even further in the 2011 European debt crisis and the American credit downgrade.

Suggested Citation

  • Libin Yang & William Rea & Alethea Rea, 2017. "Impending Doom: The Loss of Diversification before a Crisis," IJFS, MDPI, vol. 5(4), pages 1-13, November.
    • Handle: RePEc:gam:jijfss:v:5:y:2017:i:4:p:29-:d:118774
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    References listed on IDEAS

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    3. Peter Sinka & Peter J. Zeitsch, 2022. "Hedge Effectiveness of the Credit Default Swap Indices: a Spectral Decomposition and Network Topology Analysis," Computational Economics, Springer;Society for Computational Economics, vol. 60(4), pages 1375-1412, December.
    4. Leunglung Chan, 2018. "Editorial for Special Issue “Finance, Financial Risk Management and their Applications”," IJFS, MDPI, vol. 6(4), pages 1-3, October.

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