Reference : Correlation Dynamics and International Diversification Benefits
Scientific journals : Article
Business & economic sciences : Finance
Correlation Dynamics and International Diversification Benefits
Jin, Xisong mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF) >]
Christoffersen, Peter [University of Toronto > Rotman School of Management]
Errunza, Vihang [McGill University]
Jacobs, Kris [University of Houston]
International Journal of Forecasting
[en] asset pricing, asset allocation, dynamic conditional correlation (DCC), dynamic equicorrelation (DECO).
[en] 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.

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