Do World Markets Still Serve as a Hedge?

Journal of Investing, Forthcoming (1995)

Claude Erb

First Chicago Corporation, Chicago, IL 60670, USA

Campbell R. Harvey

Duke University, Durham, NC 27706, USA

National Bureau of Economic Research, Cambridge, MA 02138, USA

Tadas Viskanta

First Chicago Corporation, Chicago, IL 60670, USA

Abstract

Many active managers use state-of-the-art statistical models to forecast asset returns. Some have implemented variance forecasting models. However, less effort has been devoted to modeling correlations. The focus of our paper is on time-varying international correlations. We study how correlation is affected by the state of the economy and offer some insights into the construction of correlation forecasting models. We assess whether the hedging abilities of international capital markets for U.S. investors are different today than in the past.