The Effect of Extreme Markets on the Benefits of International Portfolio Diversification

We investigate the effects of bull and bear markets on correlations between developed and emerging country equity returns, and on the benefits of combining international markets in a portfolio. We find that, contrary to most other studies, correlations fall in both bull and bear markets, although far more in the former; that emerging markets provide both additional diversification benefits for investors in developed markets and, especially, some protection in bear markets; the effects on portfolio performance of changes in correlations and standard deviations of returns in extreme markets are very small compared to the effect of changes in mean returns