Market risks that change domestic diversification benefits

Ghulam Sarwar

The North American Journal of Economics and Finance, 2022, vol. 63, issue C

Abstract: We study the options-implied market risks and correlations to identify factors that affect U.S. stock correlations during 2007–2018. We discover that U.S. stock- and bond-market uncertainty, equity tail risk, European equity risk, and global credit risk are dominant contributors to changing correlations. While correlations rise universally with rising U.S. and European stock-market uncertainty, other market risks show diverging effects on correlations in crisis and non-crisis periods. Rising equity tail risk and global credit risk raise correlations in crisis times. Our results disentangle the risks of stock and bond markets that change the domestic stock diversification benefits.

Keywords: Diversification; Stock correlations; VIX; Bond risk; Market risks (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:63:y:2022:i:c:s1062940822001632

DOI: 10.1016/j.najef.2022.101828

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