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Dynamic analysis of time-varying correlations and cointegration relationship between Australia and frontier equity markets

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  • Sudharshan Reddy Paramati
  • Rakesh Gupta
  • Kishore Tandon

Abstract

This paper aims to demonstrate to what extent Australian stock market is correlated with those of 18 frontier markets of five different regions. We also investigate the long-run relationship between these markets. Empirical results of AGDCC GARCH model reveal that the correlations of Australian stock market with those of frontier markets are changing over time. Results show that Australia has weak correlations with all the frontier markets that are considered. Further, our analysis confirms that the effect of the GFC on stock markets' interdependence is limited to only few markets. The cointegration test results display that there is no evidence of long-run relationship between Australia and frontier markets. Empirical findings of our study suggest that Australian stock market is weakly correlated with those of frontier markets. Therefore, our study findings suggest that the Australian investors can diversify their portfolios into these frontier markets for gaining higher risk-adjusted returns.

Suggested Citation

  • Sudharshan Reddy Paramati & Rakesh Gupta & Kishore Tandon, 2016. "Dynamic analysis of time-varying correlations and cointegration relationship between Australia and frontier equity markets," International Journal of Business and Emerging Markets, Inderscience Enterprises Ltd, vol. 8(2), pages 121-145.
    • Handle: RePEc:ids:ijbema:v:8:y:2016:i:2:p:121-145
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    More about this item

    Keywords

    conditional correlations; frontier markets; global financial crisis; dynamic analysis; time-varying correlations; cointegration relationship; Australia; equity markets; stock markets; AGDCC GARCH; market interdependence; portfolio diversification; investment portfolios; risk-adjusted returns.;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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