Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach

Peter Christoffersen; Vihang Errunza; Kris Jacobs; Hugues Langlois

doi:10.1093/rfs/hhs104

Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach

Peter Christoffersen^1,2; Vihang Errunza^3,1,2,4,5; Kris Jacobs^3,1,2,4,5; Hugues Langlois^3,1,2,4,5

¹ Aarhus University · ² Aarhus Business College · ³ University of Toronto · ⁴ University of Houston · ⁵ McGill University

Review of Financial Studies 2012 open access

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.

DOI: 10.1093/rfs/hhs104
Volume: 25 (12)
Pages: 3711-3751
Language: en
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