International diversification: A copula approach

Lorán Chollete, Victor de la Peña and Ching-Chih Lu

Journal of Banking & Finance, 2011, vol. 35, issue 2, 403-417

Abstract: The viability of international diversification involves balancing benefits and costs. This balance hinges on the degree of asset dependence. In light of theoretical research linking diversification and dependence, we examine international diversification using two measures of dependence: correlations and copulas. We document several findings. First, dependence has increased over time. Second, we find evidence of asymmetric dependence or downside risk in Latin America, but less in the G5. The results indicate very little downside risk in East Asia. Third, East Asian and Latin American returns exhibit some correlation complexity. Interestingly, the regions with maximal dependence or worst diversification do not command large returns. Our results suggest international limits to diversification. They are also consistent with a possible tradeoff between international diversification and systemic risk.

Keywords: Diversification; Copula; Correlation; complexity; Downside; risk; Systemic; risk (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (66)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:2:p:403-417

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