Can we still benefit from international diversification? The case of the Czech and German stock markets

Abstract: One of the findings of the recent literature is that the 2008 financial crisis caused reduction in international diversification benefits. To fully understand the possible potential from diversification, we build an empirical model which combines generalised autoregressive score copula functions with high frequency data, and allows us to capture and forecast the conditional time-varying joint distribution of stock returns. Using this novel methodology and fresh data covering five years after the crisis, we compute the conditional diversification benefits to answer the question, whether it is still interesting for an international investor to diversify. As diversification tools, we consider the Czech PX and the German DAX broad stock indices, and we find that the diversification benefits strongly vary over the 2008--2013 crisis years.