Temporal links between the Asia-Pacific and international stock markets: 1971-2010

1 examine interdependencies between the national stock markets of the US, the UK, Japan and Australia, and consider their implications for international portfolio diversification over the 1971-2010 time period. It appears that the riskreduction benefits associated with diversification across the Anglo-American markets have steadily declined since 1993, while the diversification gains of investing in Japanese equities began diminishing around 2001, when the correlations between Japan and the other three markets commenced an upward trend. Like volatility, all conditional correlations increase in magnitude when associated with bear markets. It seems that international diversification fails to provide risk-protection when it is needed the most, during periods of financial distress.