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Is the Potential for International Diversi?cation Disappearing? A Dynamic Copula Approach

  • Peter Christoffersen

    ()

    (University of Toronto - Rotman School of Management and CREATES)

  • Vihang Errunza

    ()

    (McGill University)

  • Kris Jacobs

    ()

    (University of Houston - C.T. Bauer College of Business)

  • Hugues Langlois

    ()

    (McGill University)

International equity markets are characterized by nonlinear dependence and asymmetries. We propose a new dynamic asymmetric copula model to capture long-run and short-run dependence, multivariate nonnormality, and asymmetries in large cross-sections. We find that copula correlations have increased markedly in both developed markets (DMs) and emerging markets (EMs), but they are much lower for EMs than for DMs. Tail dependence has also increased but its level is still relatively low for EMs. We propose new measures of dynamic diversi?cation bene?ts that take into account higher order moments and nonlinear dependence. The bene?fits from international diversi?cation have reduced over time, drastically so for DMs. EMs still offer signi?cant diversi?cation bene?ts, especially during large market downturns.

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File URL: ftp://ftp.econ.au.dk/creates/rp/12/rp12_48.pdf
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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2012-48.

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Length: 53
Date of creation: 24 May 2012
Date of revision:
Handle: RePEc:aah:create:2012-48
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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