TY - JOUR
T1 - Correlation Dynamics and International Diversification Benefits
AU - Christoffersen, Peter F.
AU - Errunza, Vihang
AU - Jacobs, Kris
AU - Jin , Xisong
PY - 2014
Y1 - 2014
N2 - 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) over 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 trended upward significantly for both DMs and EMs. Based on a time-varying measure of diversification benefits, we find that it is not possible to circumvent the increasing correlations in a long-only portfolio by adjusting the portfolio weights over time. However, we do find some evidence that adding EMs to a DM-only portfolio increases diversification benefits.
AB - 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) over 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 trended upward significantly for both DMs and EMs. Based on a time-varying measure of diversification benefits, we find that it is not possible to circumvent the increasing correlations in a long-only portfolio by adjusting the portfolio weights over time. However, we do find some evidence that adding EMs to a DM-only portfolio increases diversification benefits.
KW - Asset pricing
KW - Asset allocation
KW - Dynamic conditional correlation (DCC)
KW - Dynamic equicorrelation (DECO)
U2 - 10.1016/j.ijforecast.2014.01.001
DO - 10.1016/j.ijforecast.2014.01.001
M3 - Journal article
VL - 30
SP - 807
EP - 824
JO - International Journal of Forecasting
JF - International Journal of Forecasting
SN - 0169-2070
IS - 3
ER -