Is the Potential for International Diversification Disappering?

A Dynamic Copula Approach

Peter F. Christoffersen, Vihang Errunza, Kris Jacobs, Hugues Langlois

Research output: Contribution to journalJournal articleResearchpeer-review

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 correlations have increased markedly in both developed markets (DMs) and emerging markets (EMs), but they are much lower in EMs than in DMs. Tail dependence has also increased, but its level is still relatively low in 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.
Original languageEnglish
JournalReview of Financial Studies
Volume25
Issue number12
Pages (from-to)3711-3751
ISSN0893-9454
DOIs
Publication statusPublished - Dec 2012

Cite this

Christoffersen, Peter F. ; Errunza, Vihang ; Jacobs, Kris ; Langlois, Hugues . / Is the Potential for International Diversification Disappering? A Dynamic Copula Approach. In: Review of Financial Studies. 2012 ; Vol. 25, No. 12. pp. 3711-3751.
@article{3e02a78151b342059fd41c5849f5846c,
title = "Is the Potential for International Diversification Disappering?: A Dynamic Copula Approach",
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 correlations have increased markedly in both developed markets (DMs) and emerging markets (EMs), but they are much lower in EMs than in DMs. Tail dependence has also increased, but its level is still relatively low in 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.",
author = "Christoffersen, {Peter F.} and Vihang Errunza and Kris Jacobs and Hugues Langlois",
year = "2012",
month = "12",
doi = "10.1093/rfs/hhs104",
language = "English",
volume = "25",
pages = "3711--3751",
journal = "Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",
number = "12",

}

Is the Potential for International Diversification Disappering? A Dynamic Copula Approach. / Christoffersen, Peter F.; Errunza, Vihang; Jacobs, Kris; Langlois, Hugues .

In: Review of Financial Studies, Vol. 25, No. 12, 12.2012, p. 3711-3751.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - Is the Potential for International Diversification Disappering?

T2 - A Dynamic Copula Approach

AU - Christoffersen, Peter F.

AU - Errunza, Vihang

AU - Jacobs, Kris

AU - Langlois, Hugues

PY - 2012/12

Y1 - 2012/12

N2 - 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 correlations have increased markedly in both developed markets (DMs) and emerging markets (EMs), but they are much lower in EMs than in DMs. Tail dependence has also increased, but its level is still relatively low in 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.

AB - 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 correlations have increased markedly in both developed markets (DMs) and emerging markets (EMs), but they are much lower in EMs than in DMs. Tail dependence has also increased, but its level is still relatively low in 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.

U2 - 10.1093/rfs/hhs104

DO - 10.1093/rfs/hhs104

M3 - Journal article

VL - 25

SP - 3711

EP - 3751

JO - Review of Financial Studies

JF - Review of Financial Studies

SN - 0893-9454

IS - 12

ER -