International diversification: A copula approach

Loran Chollete*, Victor de la Pena, Ching-Chih Lu

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    59 Citations (Scopus)

    Abstract

    The viability of international diversification involves balancing benefits and costs. This balance hinges on the degree of asset dependence. In light of theoretical research linking diversification and dependence, we examine international diversification using two measures of dependence: correlations and copulas. We document several findings. First, dependence has increased over time. Second, we find evidence of asymmetric dependence or downside risk in Latin America, but less in the G5. The results indicate very little downside risk in East Asia. Third, East Asian and Latin American returns exhibit some correlation complexity. Interestingly, the regions with maximal dependence or worst diversification do not command large returns. Our results suggest international limits to diversification. They are also consistent with a possible tradeoff between international diversification and systemic risk. (C) 2010 Elsevier B.V. All rights reserved.

    Original languageEnglish
    Pages (from-to)403-417
    Number of pages15
    JournalJournal of Banking & Finance
    Volume35
    Issue number2
    DOIs
    Publication statusPublished - Feb 2011

    Keywords

    • Diversification
    • Copula
    • Correlation complexity
    • Downside risk
    • Systemic risk
    • ASSET PRICES
    • EQUITY MARKETS
    • PORTFOLIO DIVERSIFICATION
    • SAMPLE AUTOCORRELATIONS
    • IMPERFECT INFORMATION
    • GENERAL-APPROACH
    • DEPENDENCE
    • RISK
    • MODELS
    • COMOVEMENT

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