Is the potential for international diversification disappearing? a dynamic copula approach

Review of Financial Studies

Volumn 25, Issue 12, 2012, Pages 3711-3751

  Christoffersen, Peter ^a,e   Errunza, Vihang ^b   Jacobs, Kris ^c,d   Langlois, Hugues ^b  

^a UNIVERSITY OF TORONTO   (Canada)

^b MCGILL UNIVERSITY   (Canada)

^c UNIVERSITY OF HOUSTON   (United States)

^d TILBURG UNIVERSITY   (Netherlands)

^e CREATES ^*  (Denmark)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 84869436145     PISSN: 08939454     EISSN: 14657368     Source Type: Journal    
DOI: 10.1093/rfs/hhs104     Document Type: Article

References (58)

1. Aielli, G. P. 2009. Dynamic conditional correlations: On properties and estimation. Working Paper, University of Florence.
2. Ang, A., and G. Bekaert. 2002. International asset allocation with regime shifts. Review of Financial Studies 15:1137-87.
3. Ang, A., and J. Chen. 2002. Asymmetric correlations of equity portfolios. Journal of Financial Economics 63:443-94.
4. Artzner, P., F. Delbaen, J.-M. Eber, and D. Heath. 1999. Coherent measures of risk. Mathematical Finance 9:203-28.
5. Baele, L., andK.Inghelbrecht. 2009. Time-varying integration and international diversification strategies. Journal of Empirical Finance 16:368-87.
6. Baele, L., G. Bekaert, and K. Inghelbrecht. 2010. The determinants of stock and bond return comovements. Review of Financial Studies 23:2374-428.
7. Basak, S., andA. Shapiro. 2001. Value-at-risk-based risk management: Optimal policies and asset prices. Review of Financial Studies 14:371-405.
8. Bekaert, G. 1995. Market integration and investment barriers in emerging equity markets. World Bank Economic Review 1:75-107.
9. Bekaert, G., and C. Harvey. 2000. Foreign speculators and emerging equity markets. Journal of Finance 55:565-613.
10. Bekaert, G., C. Harvey, C. Lundblad, and S. Siegel. 2011. What segments equity markets? Review of Financial Studies 24:3841-90.
11. Bekaert, G., R. Hodrick, and X. Zhang. 2009. International stock return comovements. Journal of Finance 64:2591-626.
12. Bekaert, G., and G. Wu. 2000. Asymmetric volatility and risk in equity markets. Review of Financial Studies 13:1-42.
13. Black, F. 1976. Studies of stock price volatility changes. In Proceedings of the American Statistical Association, Business and Economic Statistics Section, 177-81.
14. Boyer, B., T. Mitton, and K. Vorkink. 2010. Expected idiosyncratic skewness. Review of Financial Studies 23:169-202.
15. Brooks, R., and M. Del Negro. 2003. The rise in comovement across national stock markets: Market integration or IT bubble? Journal of Empirical Finance 11:659-80.
16. Carrieri, F., V. Errunza, and K. Hogan. 2007. Characterizing world market integration through time. Journal of Financial and Quantitative Analysis 42:915-40.
17. Carrieri, F., I. Chaieb, andV. Errunza. 2012. Do implicit barriers matter for globalization? Working Paper, McGill University.
18. Chen, X., andY. Fan. 2006. Estimation and model selection ofsemiparametric copula-based multivariate dynamic models under copula misspecification. Journal of Econometrics 135:125-54.
19. Colacito, R., R. Engle, and E. Ghysels. 2011. A component model for dynamic correlations. Journal of Econometrics 164:45-59.
20. Demarta, S., andA. J. McNeil. 2005. The t copula and related copulas.International Statistical Review 73:111-29.
21. DeMiguel, V., L. Garlappi, and R. Uppal. 2009. Optimal versus naive diversification: How inefficient is the 1/N portfolio strategy? Review of Financial Studies 22:1915-53.
22. DeSantis, G., and B. Gerard. 1997. International asset pricing and portfolio diversification with time-varying risk. Journal of Finance 52:1881-912.
23. Edison, H. J., and F. E. Warnock. 2003.Asimple measure of the intensity of capital controls. Journal of Empirical Finance 10:81-103.
24. Eiling, E., and B. Gerard. 2007. Dispersion, equity return correlations, and market integration. Working Paper, University of Toronto.
25. Engle, R. 2002. Dynamic conditional correlation: A simple class of multivariate GARCH models. Journal of Business and Economic Statistics 20:339-50.
26. Engle, R., E. Ghysels, and B. Sohn. 2008. On the economic sources of stock market volatility. Working Paper, New York University.
27. Engle, R., andV. Ng. 1993. Measuring and testing the impactofnewsonvolatility. Journal of Finance48:1749-78.
28. Engle, R., and J. Rangel. 2008. The spline GARCH model for low frequency volatility and its global macroeconomic causes. Review of Financial Studies 21:1187-222.
29. Engle, R., N. Shephard, and K. Sheppard. 2008. Fitting vast dimensional time-varying covariance models. Working Paper, New York University.
30. Erb, C., C. Harvey, and T. Viskanta. 1994. Forecasting international equity correlations. Financial Analysts Journal 4:32-45.
31. Errunza, V. 1977. Gains from portfolio diversification into less developed countries' securities. Journal of International Business Studies 55:83-99.
32. Errunza, V., K. Hogan, and M.-W. Hung. 1999. Can the gains from international diversification be achieved without trading abroad? Journal of Finance 54:2075-107.
33. Ferreira, M., and P. Gama. 2005. Have world, country, and industry risks changed over time? An investigation of the volatility of developed stock markets. Journal of Financial and Quantitative Analysis 40:195-222.
34. Forbes, K., and R. Rigobon. 2002. No contagion, only interdependence: Measuring stock market co-movements. Journal of Finance 57:2223-61.
35. Ghysels, E., A. Plazzi, and R. Valkanov. 2011. Conditional skewness of stock market returns in developed and emerging markets and its economic fundamentals. Working Paper, University of North Carolina.
36. Goetzmann, W., L. Li, and K. G. Rouwenhorst. 2005. Long-term global market correlations. Journal of Business 78:1-38.
37. Hansen, B. 1994. Autoregressive conditional density estimation. International Economic Review 35:705-30.
38. Karolyi, G. A., and R. Stulz. 1996. Why do markets move together? An investigation of U.S.-Japan stock return comovements. Journal of Finance 51:951-86.
39. King, M., E. Sentana, and S. Wadhwani. 1994. Volatility and links between national stock markets. Econometrica 62:901-33.
40. Kroner, K., and V. Ng. 1998. Modeling asymmetric comovement of asset returns. Review of Financial Studies 11:817-44.
41. Lewis, K. 2006. Is the international diversification potential diminishing? Foreign equity inside and outside the U.S. Working Paper, Wharton School at the University of Pennsylvania.
42. Longin, F., and B. Solnik. 2001. Extreme correlation of international equity markets. Journal of Finance 56:649-76.
43. Marsaglia, G., and I. Olkin. 1984. Generating correlation matrices. SIAM Journal on Scientific and Statistical Computing 5:470-75.
44. McNeil, A. 1999. Extreme value theory for risk managers. Internal Modeling CAD II. Risk Books, 93-113.
45. McNeil, A., and R. Frey. 2000. Estimation of tail-related risk measures for heteroscedastic financial time series: An extreme value approach. Journal of Empirical Finance 7:271-300.
46. McNeil, A., R. Frey, and P. Embrechts. 2005. Quantitative risk management. Princeton, NJ: Princeton University Press.
47. Patton, A. 2004. On the out-of-sample importance of skewness and asymmetric dependence for asset allocation. Journal of Financial Econometrics 2:130-68.
48. Patton, A. 2006. Modeling asymmetric exchange rate dependence. International Economic Review 47:527-56.
49. Patton, A.Forthcoming. Copula methods for forecasting multivariate time series. In G. Elliott andA.Timmermann (eds.), Handbook of Economic Forecasting, Volume 2, Springer Verlag.
50. Petersen, M. A. 2009. Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies 22:435-80.
51. Poon, S.-H., M. Rockinger, and J. Tawn. 2004. Extreme value dependence in financial markets: Diagnostics, models, and financial implications. Review of Financial Studies 17:581-610.
52. Rangel, J. 2011. FX comovements: Disentangling the role of market factors, carry-trades, and idiosyncratic components. Working Paper, Banco de Mexico.
53. Schwert, G. W. 1989. Why does stock market volatility change over time? Journal of Finance 44:1115-53.
54. Sklar, A. 1959. Fonctions de répartition à N dimensions et leurs marges. Publications de l'Institut de Statistique de L'Université de Paris 8:229-31.
55. Solnik, B. 1974. The international pricingofrisk:An empirical investigationofthe world capital market structure. Journal of Finance 29:365-78.
56. Solnik, B., and J. Roulet. 2000. Dispersion as cross-sectional correlation. Financial Analysts Journal 56:54-61.
57. Tse, Y., and A. Tsui. 2002. A multivariate GARCH model with time-varying correlations. Journal of Business and Economic Statistics 20:351-62.
58. Tu, J., and G. Zhou. 2011. Markowitz meets Talmud: A combination of sophisticated and naive diversification strategies. Journal of Financial Economics 99:204-15.