Correlation Dynamics and International Diversification Benefits

35 Pages Posted: 22 Aug 2013

See all articles by Peter Christoffersen

Peter Christoffersen

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

Vihang R. Errunza

McGill University - Desautels Faculty of Management

Kris Jacobs

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

Xisong Jin

Central Bank of Luxembourg

Date Written: July 8, 2013

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: Aasset pricing, asset allocation, dynamic conditional correlation (DCC), dynamic equicorrelation (DECO)

JEL Classification: G12

Suggested Citation

Christoffersen, Peter and Errunza, Vihang R. and Jacobs, Kris and Jin, Xisong, Correlation Dynamics and International Diversification Benefits (July 8, 2013). Rotman School of Management Working Paper No. 2313954. Available at SSRN: https://ssrn.com/abstract=2313954 or http://dx.doi.org/10.2139/ssrn.2313954

Peter Christoffersen (Contact Author)

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

Aarhus University - 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

Central Bank of Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg
(+352) 4774 4462 (Phone)
(+352) 4774 4902 (Fax)

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