Dynamics of dependence in international financial markets and their implications to international asset allocation Tatsuyoshi Okimoto Crawford School of Public Policy, Australian National University GS of International Corporate Strategy, Hitotsubashi University Research Institute of Economy, Trade and Industry (RIETI) March 29th, 2017 Tatsuyoshi Okimoto (ANU) Dynamics of dependence in international financial markets 1 / 24
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Dynamics of dependence in international financial marketsand their implications to international asset allocation
Tatsuyoshi Okimoto
Crawford School of Public Policy, Australian National UniversityGS of International Corporate Strategy, Hitotsubashi University
Research Institute of Economy, Trade and Industry (RIETI)
March 29th, 2017
Tatsuyoshi Okimoto (ANU) Dynamics of dependence in international financial markets 1 / 24
Introduction
Motivations1 Dependence in international financial markets has
profound implications on asset allocation2 One measure for dependence is correlation
Correlation and linear relationship
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Strongnegative
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Negativecorrelation
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3 Correlation plays an important roll for assetallocation and risk management
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Introduction
Asset allocation btw two stocks1 Consider a portfolio consisting of two risky stocks
13 Important to examine the dynamics of dependencein international financial markets
Tatsuyoshi Okimoto (ANU) Dynamics of dependence in international financial markets 6 / 24
Introduction
Background1 Understanding the dependence in international
financial markets is not be easy due to the timevariation
2 Focus on long-run trend in dependence3 Possible factors to affect the dependence in the
long-run1 Promotion of integration of financial markets2 Developments of financial market system3 Evolution in information technology4 Economic globalization
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Introduction
Previous literature1 Longin and Solnik (1995, JIMF)
1 Bivariate GARCH model with linear-trend correlation2 Correlations increase significantly for four out of six US and
other G7 country pairs2 Berben and Jansen (2005, JIMF)
1 Smooth transition GARCH model2 Correlations among the German, UK, and US stock markets
have doubled3 Bekaert, Hodrick, and Zhang (2009, JF)
1 Factor model with linear-trend correlation2 Find no evidence for an upward trend in international stock
return correlations, except for the European stock markets
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Introduction
Previous literature4 Christoffersen, Errunza, Jacobs and Langlois (2012,
RFS),1 Analyze 16 advanced countries and 17 emerging economies2 Dependence in advance equity markets increased significantly3 Increase in dependence in emerging equity markets is limited
5 Few studies examine asymmetric dependence(Okimoto, 2014, JBF)
6 Few studies focus on the long-run trend independence in East Asian equity markets(Komatsubara, Okimoto, and Tatsumi, 2016)
7 Also instructive to investigate the dependencebetween stock and bond markets (Ohmi andOkimoto, 2016, AE)
Tatsuyoshi Okimoto (ANU) Dynamics of dependence in international financial markets 9 / 24
Okimoto (2014, JBF)
Okimoto (2014, JBF)1 Examine dependence in US, UK, FR, GE equity
markets2 Use a notion of copula to analyze dependence more
comprehensivelyNormal
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Clayton
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[2] Berben, R.-P., and Jansen, W.J. (2005), “Comovement in internationalequity markets: A sectoral view,” Journal of International Money andFinance 24, 832-857.
[3] Christoffersen, P., Errunza, V., Jacobs, K., and Langlois, H. (2012), “Isthe potential for international diversification disappearing? A dynamiccopula approach,” Review of Financial Studies 25(12), 3711-3751.
[4] Komatsubara, T., Okimoto, T., Tatsumi, K. (2016), “Dynamics ofintegration in East Asian equity markets,” RIETI Discussion PaperSeries 16-E-084.
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References
[5] Lin, C.-F.J., and Terasvirta, T. (1994). “Testing the constancy ofregression parameters against continuous structural change,” Journalof Econometrics 62, 211-228.
[6] Longin, F. and Solnik, B. (1995), “Is the correlation in internationalequity returns constant: 1960-1990?,” Journal of International Moneyand Finance 14, 3-26.
[7] Ohmi, H. and Okimoto, T. (2016), “Trends in stock-bond correlations,”Applied Economics 48, 536-552.
[8] Okimoto, T. (2014), “Asymmetric Increasing Trends in Dependence inInternational Equity Markets,” Journal of Banking and Finance 46,219-232.
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