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Do frontier equity markets exhibit common trends and still provide diversification opportunities?

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  • William Miles
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    Abstract

    Many small, frontier equity markets in regions such as Africa and Eastern Europe have opened in recent years. As in other larger emerging markets, important issues for investors are the extent of financial integration with exchanges in other countries and, if some reasonable degree of integration is found, whether such markets still provide diversification opportunities. Here, we will examine a frequently used metric of integration by testing for the existence of common trends, or cointegration, in these frontier markets. While common stochastic trends are found, results show that coefficients on cointegrating vectors are at times negative, and reaction to deviations from the long-run trend are often slow, thus indicating that frontier markets are a good source of diversification opportunities despite a degree of integration.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/10168730500199475
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    Bibliographic Info

    Article provided by Korean International Economic Association in its journal International Economic Journal.

    Volume (Year): 19 (2005)
    Issue (Month): 3 ()
    Pages: 473-482

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    Handle: RePEc:taf:intecj:v:19:y:2005:i:3:p:473-482

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    Web page: http://taylorandfrancis.metapress.com/link.asp?id=110801

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    Related research

    Keywords: Portfolio choice; international financial markets;

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    1. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
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    7. Corhay, A. & Tourani Rad, A. & Urbain, J. -P., 1993. "Common stochastic trends in European stock markets," Economics Letters, Elsevier, vol. 42(4), pages 385-390.
    8. Bekaert, Geert, 1995. "Market Integration and Investment Barriers in Emerging Equity Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 75-107, January.
    9. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
    10. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
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