Long-Run International Diversification

57 Pages Posted: 5 Mar 2015 Last revised: 20 Sep 2016

See all articles by Thomas Conlon

Thomas Conlon

University College Dublin

John Cotter

University College Dublin; UCLA Anderson School of Management

Ramazan Gencay

Simon Fraser University

Date Written: March 4, 2015

Abstract

The evidence for international diversification as a means to curtail portfolio risk relies predominantly on short-run data. In this paper, we examine the extent to which the risk reduction benefits of international investment hold in the long-run. Employing a multi-horizon non-parametric filter, we develop a long-run correlation estimator and exploit this to decompose the long-run inter-market relationship into short-run components. We observe raised correlations between international equity indices in the long-run. Investigating the economic significance for investors, we find the long-run benefits of international diversification to be attenuated. Increasing long-run correlation is modeled as a function of short-run data accounting for characteristics pervasive in financial time series. This indicates that perceived risk reduction benefits may be overstated using short-run data.

Keywords: International Diversification, International Finance, Long-Run, Correlation

JEL Classification: F21; F30; G11; G15; C32

Suggested Citation

Conlon, Thomas and Cotter, John and Gencay, Ramazan, Long-Run International Diversification (March 4, 2015). Available at SSRN: https://ssrn.com/abstract=2573644 or http://dx.doi.org/10.2139/ssrn.2573644

Thomas Conlon (Contact Author)

University College Dublin ( email )

Smurfit Graduate Business School
Blackrock
Co. Dublin, n/a
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/drthomasconlon/

John Cotter

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/professorjohncotter/

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Ramazan Gencay

Simon Fraser University ( email )

Department of Economics
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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