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Benefits of diversifying investments into emerging markets with time-varying correlations: An Australian perspective

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  • Gupta, R.
  • Donleavy, G.D.

Abstract

Australian investors can reduce their overall portfolio risk by diversifying into equities from other markets. Emerging markets have attracted significant interest because of their low correlations with Australian equity market returns; however, a number of studies have indicated that correlations between equity returns are increasing over time, so using unconditional estimates of correlations in a portfolio optimization model can result in the selection of a portfolio that may not be optimal. We use an Asymmetric Dynamic Conditional Correlation GARCH model to estimate time-varying correlations and include these correlation estimates in the portfolio optimization model. The assets used for portfolio construction comprise seven emerging market indices that are available to foreign investors. This study finds that, despite increasing correlations, there are still potential benefits for Australian investors who diversify into international emerging markets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Multinational Financial Management.

Volume (Year): 19 (2009)
Issue (Month): 2 (April)
Pages: 160-177

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Handle: RePEc:eee:mulfin:v:19:y:2009:i:2:p:160-177

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Web page: http://www.elsevier.com/locate/mulfin

Related research

Keywords: Australian investors Emerging market equities Time-varying correlations Asymmetric DCC GARCH models International diversification;

References

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Citations

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Cited by:
  1. Samitas, Aristeidis & Tsakalos, Ioannis, 2013. "How can a small country affect the European economy? The Greek contagion phenomenon," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 18-32.
  2. Diyarbakirlioglu, Erkin, 2011. "Domestic and foreign country bias in international equity portfolios," Journal of Multinational Financial Management, Elsevier, vol. 21(5), pages 301-329.
  3. Suthawan Prukumpai & Yuthana Sethapramote, 2013. "Exploring the Dynamic Interdependence among the East Asian Stock Markets," Diversity, Technology, and Innovation for Operational Competitiveness: Proceedings of the 2013 International Conference on Technology Innovation and Industrial Management, ToKnowPress.
  4. Nistor, Costel & Dumitriu, Ramona & Stefanescu, Razvan, 2012. "Impact of the global crisis on the linkages between CAC 40 and indexes from CEE countries," MPRA Paper 42511, University Library of Munich, Germany, revised 18 Sep 2012.
  5. Axel Grossmann & Emiliano Giudici & Marc Simpson, 2014. "Euro conversion and return dynamics of European financial markets: a frequency domain approach," Journal of Economics and Finance, Springer, vol. 38(1), pages 1-26, January.
  6. Dumitriu, Ramona & Stefanescu, Razvan, 2013. "DOW effects in returns and in volatility of stock markets during quiet and turbulent times," MPRA Paper 47218, University Library of Munich, Germany, revised 02 Apr 2013.
  7. Omid Sabbaghi & Navid Sabbaghi, 2014. "An empirical analysis of the Carbon Financial Instrument," Journal of Economics and Finance, Springer, vol. 38(2), pages 209-234, April.
  8. Lean, Hooi Hooi & Teng, Kee Tuan, 2013. "Integration of world leaders and emerging powers into the Malaysian stock market: A DCC-MGARCH approach," Economic Modelling, Elsevier, vol. 32(C), pages 333-342.
  9. Zhang, Bing & Li, Xindan & Yu, Honghai, 2013. "Has recent financial crisis changed permanently the correlations between BRICS and developed stock markets?," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 725-738.
  10. Chaido Dritsaki, 2011. "The Random Walk Hypothesis and Correlation in the Visegrad Countries Emerging Stock Markets," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 14(40), pages 25-56, June.
  11. Francesco Guidi & Rakesh Gupta, 2011. "Are ASEAN stock market efficient? Evidence from univariate and multivariate variance ratio tests," Discussion Papers in Finance finance:201113, Griffith University, Department of Accounting, Finance and Economics.

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