Dynamics among Traditional and Alternative Assets: Implications for Diversification and Risk

Abstract

The authors examine the dynamic correlations and implications of various fi nancial asset classes, such as equities, bonds, ETFs, commodities, and real estate, in the United States from 1990 to 2013 and find that the correlations have varied across time. They detect no evidence of contagion but rather of herding behavior among these assets. The variation was more pronounced during market declines, but differed in extent across economic expansions and contractions. Finally, shocks from one asset class to another were not persistent, meaning that the assets were able to absorb the shocks and quickly return to normalcy. The implications for portfolio decisions are clear: Even well-diversified portfolios must be updated to reflect changing economic and financial environments, and past asset behavior does not imply similar future behavior.