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Can advanced markets help diversify risks in frontier stock markets? Evidence from Gulf Arab stock markets

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  • Demirer, Riza

Abstract

This study examines global diversification benefits from the perspective of local investors in the frontier markets in the Gulf Cooperation Council using two diversification measures: the correlation index and return dispersion. The findings suggest a strong link between market volatility and both diversification measures in all markets, with the exception of Bahrain, indicating that investors in these frontier markets will face significant challenges achieving desired levels of diversification using domestic stocks only. However, I also find that significant amount of market risk in these countries can be eliminated by supplementing domestic portfolios with positions in advanced markets. Finally, I show that risk minimization strategies using foreign traded assets also lead to favorable risk adjusted returns for investors in these markets, stressing the potential benefits of financial liberalization in developing markets.

Suggested Citation

  • Demirer, Riza, 2013. "Can advanced markets help diversify risks in frontier stock markets? Evidence from Gulf Arab stock markets," Research in International Business and Finance, Elsevier, vol. 29(C), pages 77-98.
  • Handle: RePEc:eee:riibaf:v:29:y:2013:i:c:p:77-98
    DOI: 10.1016/j.ribaf.2013.04.001
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    Cited by:

    1. Syed Abul, Basher & Salem, Nechi & Hui, Zhu, 2014. "Dependence patterns across Gulf Arab stock markets: a copula approach," MPRA Paper 56566, University Library of Munich, Germany.
    2. Balcılar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat, 2015. "Regional and global spillovers and diversification opportunities in the GCC equity sectors," Emerging Markets Review, Elsevier, vol. 24(C), pages 160-187.
    3. Demirer, Rıza & Lee, Hsiang-Tai & Lien, Donald, 2015. "Does the stock market drive herd behavior in commodity futures markets?," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 32-44.
    4. Elie I Bouri, 2013. "Correlation and Volatility of the MENA Equity Markets in Turbulent Periods, and Portfolio Implications," Economics Bulletin, AccessEcon, vol. 33(2), pages 1575-1593.
    5. Balcilar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat, 2014. "What drives herding in oil-rich, developing stock markets? Relative roles of own volatility and global factors," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 418-440.
    6. repec:eee:eneeco:v:68:y:2017:i:c:p:440-453 is not listed on IDEAS

    More about this item

    Keywords

    Portfolio diversification; Downside risk; Return dispersion; Correlation index; GCC stock markets;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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