International Diversification: A Copula Approach

The viability of international diversification involves balancing benefits and costs.This balance hinges on the degree of asset dependence. In light of theoretical researchlinking diversification and dependence, we examine international diversification usingtwo measures of dependence: correlations and copulas. We document several findings.First, both measures agree that dependence has increased over time. Second, there isevidence of asymmetric dependence or downside risk in the G5 and Latin America,but very little in east Asia...