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Long-run international diversification

Thomas Conlon (), John Cotter () and Ramazan Gencay

No 201502, Working Papers from Geary Institute, University College Dublin

Abstract: Prevailing wisdom in nance suggests long-run investors have a competitive advantage, since they can ride out short-run uctuations and mispricing, and pursue illiquid investments. This paper investigates if this advantage holds in a portfolio context, examining bene ts of international diversi cation across short- and longrun horizons. Employing a multi-horizon non-parametric lter, increased long-run correlations between international equity markets are detailed, even for synchronized markets. A model replicating the temporal aggregation properties of intermarket correlation is developed, indicating that short-run correlations are downward biased by frictions. Finally, the impact on portfolio allocation is investigated, demonstrating decreased risk reduction bene ts in the long-run.

Pages: 61 pages
Date: 2015-03-11
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