International Diversification in the Face of the Subprime Crisis

This study examines the impact of the 2007–2008 subprime crisis on the efficacy of international portfolio diversification by analyzing the dynamic correlations and volatility of 30 global equity indices relative to the MSCI World Index across pre- and post-crisis periods. Using a multi-methodological approach,including descriptive statistics, correlation analysis, and GARCH(1,1) model .We find a significant crisis-induced convergence in international market correlations, particularly among developed economies and financially integrated emerging markets such as Brazil, which substantially eroded traditional diversification benefits. However, certain emerging and frontier markets, notably in Africa and select Asian economies, maintained low correlations with the global benchmark, preserving their diversification potential. These results suggest that while the subprime crisis challenged conventional geographic diversification strategies, a dynamic, selective, and factor-based approach to international asset allocation remains viable, particularly through exposure to less-integrated markets exhibiting idiosyncratic risk-return profiles.