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Correlation Dynamics and International Diversification Benefits

Author

Listed:
  • Peter Christoffersen

    (University of Toronto)

  • Vihang R. Errunza

    (McGill University)

  • Kris Jacobs

    (University of Houston)

  • Xisong Jin

    (University of Luxembourg)

Abstract

Forecasting 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.

Suggested Citation

  • Peter Christoffersen & Vihang R. Errunza & Kris Jacobs & Xisong Jin, 2013. "Correlation Dynamics and International Diversification Benefits," CREATES Research Papers 2013-49, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2013-49
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    File URL: https://repec.econ.au.dk/repec/creates/rp/13/rp13_49.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Asset pricing; asset allocation; dynamic conditional correlation (DCC); dynamic equicorrelation (DECO);
    All these keywords.

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

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