International and Temporal Diversifications: The Best of Both Worlds?

28 Pages Posted: 29 Mar 2018

Date Written: March 28, 2018

Abstract

Modern portfolio theory advises investors to diversify their assets to reduce risk. Diversification encompasses two major concepts: international and temporal diversifications. While international diversification tells investors how many and what type of assets they should put in their portfolios to diversify them, temporal diversification tells them how long they should hold the assets in their portfolios. To investigate these questions simultaneously, we propose an alternative approach based on two recent methodologies: wavelets and copulas. We focus on seven stock market indexes in different geographical areas. Our main findings are the following. First, we confirm the usual benefits of international diversification. Second, the results of nonparametric copulas show that the shape of the copula varies across the long or short term of the relationship. Third, this methodology shows some structural differences in dependencies across different timescales. We then highlight the existence of potential holding periods that allow investors to improve their diversification processes and identify risks.

Keywords: wavelets, copulas, international and temporal diversification, temporal diversification, portfolio management

Suggested Citation

Fouquau, Julien and Kharoubi, Cecile and Spieser, Philippe, International and Temporal Diversifications: The Best of Both Worlds? (March 28, 2018). Journal of Risk, 2018, Available at SSRN: https://ssrn.com/abstract=3151752

Julien Fouquau (Contact Author)

ESCP Business School ( email )

79 avenue de la République
75011
France

Cecile Kharoubi

ESCP Europe ( email )

79, avenue de la République
Paris, 75011
France

Philippe Spieser

ESCP Europe ( email )

79, avenue de la République
Paris, 75011
France

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1
Abstract Views
632
PlumX Metrics