Where to Hide in Bad Times: Or Should One Still Diversify Internationally?

Among the stylized features of international equity markets is the pronounced asymmetric nonlinear dependence and upward trend in correlations. Such features call into question investors' efforts to diversify internationally. We propose a model to capture those well understood characteristics of international equity index returns. Casting them in a dynamic portfolio problem, we evaluate the gains for a home-biased investor from including foreign assets in her portfolio. We find that accounting for the optimal dynamic demand for hedging on top of a standard mean-variance portfolio policy brings substantial benefits from international portfolio exposure. Such benefits become increasingly sizeable over long investment horizons.

Keywords: Asset Allocation, Dynamic Correlations, Asymmetric Dependence, Diversification

JEL Classification: C15, C51, G11

Suggested Citation: Suggested Citation

Elkamhi, Redouane and Stefanova, Denitsa, Where to Hide in Bad Times: Or Should One Still Diversify Internationally? (July 1, 2016). Rotman School of Management Working Paper No. 2812623, 29th Australasian Finance and Banking Conference 2016, Available at SSRN: https://ssrn.com/abstract=2812623 or http://dx.doi.org/10.2139/ssrn.2812623