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Correlation Dynamics and International Diversification Benefits

Peter Christoffersen, Vihang R. Errunza (), Kris Jacobs () and Xisong Jin ()
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Vihang R. Errunza: McGill University, Postal: 1001 Sherbrooke St. West, Montreal, Quebec H3A1G5 H3A 2M1, Canada
Kris Jacobs: University of Houston, Postal: Houston, TX 77204-6021, United States

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

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) during 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 significantly trended upward for both DMs and EMs. Based on a time-varying measure of diversification benefit, we ?find that it is not possible in a long-only portfolio to circumvent the increasing correlations 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)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 35
Date: 2013-08-07
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-for
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Citations: View citations in EconPapers (2)

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Journal Article: Correlation dynamics and international diversification benefits (2014) Downloads
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