The Diminishing Benefits Of Nae International Portfolio Diversification Following The 1997 Asian Financial Crisis

Abstract

Nae international diversification has been fundamental to portfolio management over the past 30 years, but the benefits appear to be significantly diminished following the 1997 Asian financial crisis. Using monthly return data covering the period from 1970 through 2004, we found rising correlations between U.S. and international equity markets exceeding 0.85 since July 1997. Even the return correlation of emerging countries recently has reached almost 0.80. We also found a significant reduction in the variance of the international return correlation after the financial crisis. Portfolio managers should not expect to receive the same benefits from international portfolio diversification as that obtained prior to the Asian financial crisis.