NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

International Asset Allocation with Time-Varying Correlations

Andrew Ang, Geert Bekaert

NBER Working Paper No. 7056
Issued in March 1999
NBER Program(s):   IFM

It is widely believed that correlations between international equity markets tend to increase in highly volatile bear markets. This has led some to doubt the benefits of international diversification. This article solves the dynamic portfolio choice problem of a US investor faced with a time-varying investment opportunity set which may be characterized by correlations and volatilities that increase in bad times. We model the state dependance of US, UK, and German equity returns using a regime-switching model and find evidence for the existence of a high volatility regime, in which returns are more highly correlated and have lower means. Solving the dynamic asset allocation problem for a CCRA investor, we show international diversification is still valuable with regime changes. Currency hedging imparts further benefit. The costs of ignoring the regimes are small for moderate levels of risk aversion, and the intertemporal hedging demands induced by time-varying correlations are negligible.

download in pdf format
   (853 K)

email paper

This paper is available as PDF (853 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7056

Published: Ang, A. and G. Bekaert. "International Asset Allocation With Regime Shifts," Review of Financial Studies, 2002, v15(4), 1137-1187.

Users who downloaded this paper also downloaded these:
Ang and Bekaert w10080 How do Regimes Affect Asset Allocation?
Liu, Longstaff, and Pan w9103 Dynamic Asset Allocation With Event Risk
Campbell, Chan, and Viceira w8566 A Multivariate Model of Strategic Asset Allocation
Ang and Bekaert w6508 Regime Switches in Interest Rates
Harvey w4623 Conditional Asset Allocation in Emerging Markets
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us