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Int. J. Financial Stud. 2017, 5(4), 29; https://doi.org/10.3390/ijfs5040029

Impending Doom: The Loss of Diversification before a Crisis

1
Department of Economics and Finance, University of Canterbury, Christchurch 8140, New Zealand
2
Centre for Applied Statistics, University of Western Australia, Crawley, WA 6009, Australia
*
Author to whom correspondence should be addressed.
Academic Editor: Leung Lung Chan
Received: 25 October 2017 / Revised: 4 November 2017 / Accepted: 7 November 2017 / Published: 14 November 2017
(This article belongs to the Special Issue Finance, Financial Risk Management and their Applications)
Full-Text   |   PDF [332 KB, uploaded 14 November 2017]   |  

Abstract

We present four methods of assessing the diversification potential within a stock market, and two of these are based on principal component analysis. They were applied to the Australian stock exchange for the years 2000 to 2014 and all show a consistent picture. The potential for diversification declined almost monotonically in the three years prior to the 2008 financial crisis, leaving investors poorly diversified at the onset of the Global Financial Crisis. On one of the four measures, the diversification potential declined even further in the 2011 European debt crisis and the American credit downgrade. View Full-Text
Keywords: principal component analysis; stock selection; diversification; stock portfolios; ASX200 principal component analysis; stock selection; diversification; stock portfolios; ASX200
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Yang, L.; Rea, W.; Rea, A. Impending Doom: The Loss of Diversification before a Crisis. Int. J. Financial Stud. 2017, 5, 29.

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Int. J. Financial Stud. EISSN 2227-7072 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
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