Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach

Review of Financial Studies, 2012, Vol. 25, No. 12, pp. 3711-3751.

53 Pages Posted: 24 May 2012 Last revised: 20 Jan 2013

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

Hugues Langlois

HEC Paris - Finance Department

Date Written: May 24, 2012

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 diversification benefits that take into account higher order moments and nonlinear dependence. The benefits from international diversification have reduced over time, drastically so for DMs. EMs still offer significant diversification benefits, especially during large market downturns.

Keywords: Asset allocation, dynamic dependence, dynamic copula, asymmetric dependence

JEL Classification: G12

Suggested Citation

Christoffersen, Peter and Errunza, Vihang R. and Jacobs, Kris and Langlois, Hugues, Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach (May 24, 2012). Review of Financial Studies, 2012, Vol. 25, No. 12, pp. 3711-3751.. Available at SSRN: https://ssrn.com/abstract=2066076 or http://dx.doi.org/10.2139/ssrn.2066076

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

Hugues Langlois (Contact Author)

HEC Paris - Finance Department ( email )

France

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