Correlation dynamics and international diversification benefits

Peter Christoffersen, Vihang Errunza, Kris Jacobs and Xisong Jin

International Journal of Forecasting, 2014, vol. 30, issue 3, 807-824

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) over 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 trended upward significantly for both DMs and EMs. Based on a time-varying measure of diversification benefits, we find that it is not possible to circumvent the increasing correlations in a long-only portfolio by adjusting the portfolio weights over time. However, we do find some evidence that adding EMs to a DM-only portfolio increases diversification benefits.

Keywords: Asset pricing; Asset allocation; Dynamic conditional correlation (DCC); Dynamic equicorrelation (DECO) (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (68)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0169207014000028
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Correlation Dynamics and International Diversification Benefits (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:30:y:2014:i:3:p:807-824

DOI: 10.1016/j.ijforecast.2014.01.001

Access Statistics for this article

International Journal of Forecasting is currently edited by R. J. Hyndman

More articles in International Journal of Forecasting from Elsevier
Bibliographic data for series maintained by Catherine Liu ().