Is the Potential for International Diversi?cation Disappearing? A Dynamic Copula Approach

Peter Christoffersen, Vihang Errunza (), Kris Jacobs () and Hugues Langlois ()
Additional contact information
Vihang Errunza: McGill University, Postal: 1001 rue Sherbrooke Ouest, Montreal H3A 1G5 Quebec, Canada
Kris Jacobs: University of Houston - C.T. Bauer College of Business, Postal: Houston, TX 77204-6021, United States
Hugues Langlois: McGill University, Postal: 1001 rue Sherbrooke Ouest, Montreal H3A 1G5 Quebec, Canada

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: International equity markets are characterized by nonlinear dependence and asymmetries. We propose a new dynamic asymmetric copula model to capture long-run and short-run dependence, multivariate nonnormality, and asymmetries in large cross-sections. We find that copula correlations have increased markedly in both developed markets (DMs) and emerging markets (EMs), but they are much lower for EMs than for DMs. Tail dependence has also increased but its level is still relatively low for EMs. We propose new measures of dynamic diversi?cation bene?ts that take into account higher order moments and nonlinear dependence. The bene?fits from international diversi?cation have reduced over time, drastically so for DMs. EMs still offer signi?cant diversi?cation bene?ts, especially during large market downturns.

Keywords: Asset allocation; dynamic dependence; dynamic copula; asymmetric dependence. (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 53
Date: 2012-05-24
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Citations: View citations in EconPapers (256)

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Journal Article: Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach (2012)
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