Impending Doom: The Loss of Diversification before a Crisis

Libin Yang, William Rea and Alethea Rea
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Libin Yang: Department of Economics and Finance, University of Canterbury, Christchurch 8140, New Zealand
William Rea: Department of Economics and Finance, University of Canterbury, Christchurch 8140, New Zealand
Alethea Rea: Centre for Applied Statistics, University of Western Australia, Crawley, WA 6009, Australia

IJFS, 2017, vol. 5, issue 4, 1-13

Abstract: We present four methods of assessing the diversification potential within a stock market, and two of these are based on principal component analysis. They were applied to the Australian stock exchange for the years 2000 to 2014 and all show a consistent picture. The potential for diversification declined almost monotonically in the three years prior to the 2008 financial crisis, leaving investors poorly diversified at the onset of the Global Financial Crisis. On one of the four measures, the diversification potential declined even further in the 2011 European debt crisis and the American credit downgrade.

Keywords: principal component analysis; stock selection; diversification; stock portfolios; ASX200 (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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