Abstract

http://ssrn.com/abstract=1573345
 
 

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Is the Potential for International Diversification Disappearing?


Peter Christoffersen


University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Vihang R. Errunza


McGill University - Desautels Faculty of Management

Kris Jacobs


University of Houston - C.T. Bauer College of Business

Xisong Jin


University of Luxembourg - Luxembourg School of Finance

March 16, 2010


Abstract:     
Since understanding and quantifying the evolution of security co-movements is critical for asset pricing and portfolio allocation, we investigate patterns and trends in correlations over time using weekly returns for large systems of developed markets (DMs) and emerging markets (EMs) during the period 1973-2009. We use the DECO, DCC, and BEKK correlation models, and develop a novel dynamic t-copula which generalizes the normal copula, to allow for dynamic tail dependence. We demonstrate that it is possible to overcome the well known dimensionality problems and compute correlation and tail dependence in international markets using large samples, without relying on factor models. Our results suggest that correlations have been significantly trending upward for both the DMs and EMs. Further, the evidence clearly contradicts the decoupling hypothesis. Although the tail dependence is increasing through time for both EMs and DMs, the level of the tail dependence is still very low at the end of our sample period for EMs as compared to DMs. Therefore, while the correlation analysis suggests that the diversification potential of EMs has largely disappeared, this is contradicted by our findings on tail dependence. Thus, even though diversification benefits might have lessened in the case of DMs, the case for EMs remains intact.

Number of Pages in PDF File: 41

Keywords: international asset pricing, asset allocation, dynamic conditional correlation (DCC), dynamic equicorrelation (DECO), dynamic copula

JEL Classification: G15

working papers series


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Date posted: March 21, 2010  

Suggested Citation

Christoffersen, Peter and Errunza, Vihang R. and Jacobs, Kris and Jin, Xisong, Is the Potential for International Diversification Disappearing? (March 16, 2010). Available at SSRN: http://ssrn.com/abstract=1573345 or http://dx.doi.org/10.2139/ssrn.1573345

Contact Information

Peter Christoffersen
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)
HOME PAGE: http://www.christoffersen.com
Copenhagen Business School
Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
University of Aarhus - CREATES
School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark
Vihang R. Errunza
McGill University - Desautels Faculty of Management ( email )
1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-4056 (Phone)
514-398-3876 (Fax)
Kris Jacobs
University of Houston - C.T. Bauer College of Business ( email )
Houston, TX 77204-6021
United States
Xisong Jin (Contact Author)
University of Luxembourg - Luxembourg School of Finance ( email )
4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg
+352 466644 5626 (Phone)
+352 466644 6835 (Fax)
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