TY  - JOUR
AU  - Ang,Andrew
AU  - Bekaert,Geert
TI  - International Asset Allocation with Time-Varying Correlations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7056
PY  - 1999
Y2  - March 1999
UR  - http://www.nber.org/papers/w7056
L1  - http://www.nber.org/papers/w7056.pdf
N1  - Author contact info:
Andrew Ang
Columbia Business School
3022 Broadway 413 Uris
New York, NY 10027
Tel: 212/854-9154
Fax: 212/662-8474
E-Mail: aa610@columbia.edu

Geert Bekaert
Graduate School of Business
Columbia University
3022 Broadway, 411 Uris Hall
New York, NY 10027
Tel: 212/854-9156
Fax: 212/662-8474
E-Mail: gb241@columbia.edu
AB  - 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.
ER  -