International Diversification and the Investor Horizon

In this paper, we investigate the benefits of international diversification over short-and long-run horizons. Average unconditional correlation between international equity markets is first shown to increase at long horizons, even for synchronized market data. Next, a conditional horizon-dependent correlation measure is pro-posed, providing evidence of a positive trend in correlation which is strongest at long horizon. To further elucidate the results, a model replicating the temporal aggregation of inter-market correlation is proposed. Finally, we investigate the impact on portfolio allocation, demonstrating decreased risk reduction benefits at long-run horizons