Dynamics among global asset portfolios

Abstract

We examine the dynamic correlations among several global financial assets with an eye to potential portfolio diversification benefits during the 2008 US financial crisis and EMU sovereign debt crisis of the 2010s. Our findings are summarized as follows: First, evidence for rigorous, dynamic cross-correlations among global equities around the 2008 crisis suggested a weak global diversification potential. Second, financial spillovers strengthened in the post-crisis period thus, exhibiting cycles of inter-linkages among various assets classes. Third, heterogeneous global portfolios (that is, portfolios formed by various asset classes) offered greater returns than homogeneous portfolios for the whole period and especially in the period preceding the 2008 crisis. Overall, we conclude that the US and EMU crisis periods did not affect assets in the same way and hence, risk managers should follow portfolio-construction strategies with risk-offsetting assets (such as commodities) with regard to their cyclical/countercyclical movements.