Abstract
Existing literature suggests that conditional correlations between equity markets vary over time, and increase over periods of financial crises. I test this hypothesis on a set of eight national equity indices from the Asia-Pacific region on one hand, and the US market on the other. Tse (2000) constant conditional correlation test suggests that three out of eight market pairs exhibit constant conditional correlations. The remaining five correlations are time varying, but can be further subdivided into those that are characterized by high persistence in the dynamics, and those which display strong mean reversion graphs. Global asset managers should take these features into account when allocating funds across the Asia-Pacific as the expected diversification gains are likely to differ across the region, and depend on the characteristics of the correlation coefficients.
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