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Time Variation And Asymmetry In The World Price Of Covariance Risk: The Implications For International Diversification

  • Olan T. Henry
  • Nilss Olekalns
  • Kalvinder Shields

The International Capital Asset Pricing Model measures country risk in terms of the conditional covariance of national returns with the world return. Using impulse responses from a multivariate nonlinear model we provide evidence of time variation and asymmetry in the measure of country risk. and the implied benefit to international diversification. The evidence implies that the price of risk and the benefits from diversification may differ in a statistically and economically meaningful fashion across bull and bear markets.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 907.

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Length: 36 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:mlb:wpaper:907
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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  2. van Dijk, D.J.C. & Franses, Ph.H.B.F. & Boswijk, H.P., 2000. "Asymmetric and common absorption of shocks in nonlinear autoregressive models," Econometric Institute Research Papers EI 2000-01/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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  8. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  9. Kalvinder Shields & Nilss Olekalns & Ólan T. Henry & Chris Brooks, 2003. "Measuring the Response of Macroeconomic Uncertainty to Shocks," Department of Economics - Working Papers Series 870, The University of Melbourne.
  10. K.C. Chan & G. Andrew Karolyi & Rene M. Stulz, 1992. "Global Financial Markets and the Risk Premium on U.S. Equity," NBER Working Papers 4074, National Bureau of Economic Research, Inc.
  11. Young-Hye Cho & Robert F. Engle, 1999. "Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks," NBER Working Papers 7330, National Bureau of Economic Research, Inc.
  12. Brooks, C. & Henry, O.T., 1999. "Linear and Non-Linear Transmission of Equity Return Volatility: Evidence From the US, Japan, and Australia," Department of Economics - Working Papers Series 676, The University of Melbourne.
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  14. John M. Griffin & G. Andrew Karolyi, . "Another Look at the Role of the Industrial Structure of Markets for International Diversification Strategies," Research in Financial Economics 9608, Ohio State University.
  15. Shields, KalvInder & Kevin B Grier & Olan T Henry & Nilss Olekalns, 2003. "The Asymmetric Effects of Uncertainty on Inflation and Output Growth," Royal Economic Society Annual Conference 2003 187, Royal Economic Society.
  16. Attanasio, Orazio P, 1991. "Risk, Time-Varying Second Moments and Market Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 479-94, May.
  17. Stulz, ReneM., 1981. "A model of international asset pricing," Journal of Financial Economics, Elsevier, vol. 9(4), pages 383-406, December.
  18. Karolyi, G Andrew & Stulz, Rene M, 1996. " Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Journal of Finance, American Finance Association, vol. 51(3), pages 951-86, July.
  19. Giovannini, Alberto & Jorion, Philippe, 1989. " The Time Variation of Risk and Return in the Foreign Exchange and Stock Markets," Journal of Finance, American Finance Association, vol. 44(2), pages 307-25, June.
  20. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-84, June.
  21. Geert Bekaert & Campbell R. Harvey & Angela Ng, 2005. "Market Integration and Contagion," The Journal of Business, University of Chicago Press, vol. 78(1), pages 39-70, January.
  22. Chang, Eric & Eun, Cheol S. & Kolodny, Richard, 1995. "International diversification through closed-end country funds," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1237-1263, October.
  23. Geert Bekaert & Campbell R. Harvey, 1995. "Emerging Equity Market Volatility," NBER Working Papers 5307, National Bureau of Economic Research, Inc.
  24. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  25. HAFNER, Christian M. & HERWARTZ, Helmut, 1998. "Volatility impulse response functions for multivariate GARCH models," CORE Discussion Papers 1998047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  26. Gonzalez-Rivera, Gloria, 1996. "Time-varying risk The case of the American computer industry," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 333-342, February.
  27. Bera, Anil K. & Jarque, Carlos M., 1982. "Model specification tests : A simultaneous approach," Journal of Econometrics, Elsevier, vol. 20(1), pages 59-82, October.
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