Title: BRIC dynamic conditional correlations, portfolio diversification and rebalancing after the global financial crisis of 2008-2009

Authors: Maria Zakia Papanikolaou Mostafa; Stavros Stavroyiannis

Addresses: Department of Accounting and Finance, Technological Educational Institute of Peloponnese, 241 00, Greece ' Department of Accounting and Finance, Technological Educational Institute of Peloponnese, 241 00, Greece

Abstract: Financial liberalisation has offered global investors with new investment opportunities via international portfolio diversification. Proper investment planning as well as portfolio diversification and rebalancing require low correlations between the assets under consideration. In general, correlations between countries have increased during the global financial crisis due to contagion, interdependence, or herding. In this work we use the dynamic conditional correlation model to examine whether the correlations between the BRIC countries, as well as the correlations between the BRIC countries and the US, UK, Europe and Japan markets, still remain high. As an improved approach we use batch code to assign each country its own dynamic model for better specification of the correlations. After computing the covariance matrix we optimise portfolios consisting of eight assets both for long only and short allowed positions. The results indicate that the correlations have started to decrease and BRIC maintain a significant percentage in a globally diversified portfolio.

Keywords: financial crisis; BRIC countries; emerging markets; t-DCC model; portfolio diversification; dynamic conditional correlation; rebalancing; investment planning; USA; United States; UK; United Kingdom; Europe; Japan; covariance matrix.

DOI: 10.1504/GBER.2016.073304

Global Business and Economics Review, 2016 Vol.18 No.1, pp.28 - 40

Received: 27 Jun 2014
Accepted: 01 Oct 2014

Published online: 16 Nov 2015 *

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