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Portfolio diversification strategy for Malaysia: International and sectoral perspectives

Listed author(s):
  • Hakim, Idwan
  • Masih, Mansur

The focus of this paper is to investigate the potential for portfolio diversification strategies based on investing across international markets or economic sectors, using Malaysia as a case study. Analysing the comovement and correlation between returns and volatilities of the different markets or assets, therefore, is the key to gauge the potential benefits from diversification. Two important features of the comovement are their dynamic fluctuations across time period and time horizon or scales. Thus, the paper applies recent techniques of multivariate volatility modelling and wavelet transform, which can analyse time series over both the time and frequency domain. Our findings suggest that there are potential for gains from portfolio diversification strategies into both international markets, as well as sectors of the domestic stock market. There are international stock markets and domestic sectors which have low correlations and comovement with the Kuala Lumpur Composite Index. The low correlation makes it ideal to diversify the portfolio and reduce the overall investment risks. However, the findings also noted that the correlations vary across time and scales. Hence, fund managers need to be aware of the dynamics which may change at any particular point in time, which may affect the portfolio risks.

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File URL: https://mpra.ub.uni-muenchen.de/58909/1/MPRA_paper_58909.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 58909.

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Date of creation: 26 Sep 2014
Handle: RePEc:pra:mprapa:58909
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  1. Ehling, Paul & Ramos, Sofia B., 2006. "Geographic versus industry diversification: Constraints matter," Journal of Empirical Finance, Elsevier, vol. 13(4-5), pages 396-416, October.
  2. Nektarios Aslanidis & Christos S. Savva, 2011. "Are There Still Portfolio Diversification Benefits In Eastern Europe? Aggregate Versus Sectoral Stock Market Data," Manchester School, University of Manchester, vol. 79(6), pages 1323-1352, December.
  3. Mark Rubinstein, 2002. "Markowitz's "Portfolio Selection": A Fifty-Year Retrospective," Journal of Finance, American Finance Association, vol. 57(3), pages 1041-1045, 06.
  4. Mara Madaleno & Carlos Pinho, 2012. "International stock market indices comovements: a new look," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(1), pages 89-102, 01.
  5. Rua, António & Nunes, Luís C., 2009. "International comovement of stock market returns: A wavelet analysis," Journal of Empirical Finance, Elsevier, vol. 16(4), pages 632-639, September.
  6. Ahmed, Walid M.A., 2011. "Comovements and Causality of Sector Price Indices: Evidence from the Egyptian Stock Exchange," MPRA Paper 28127, University Library of Munich, Germany.
  7. Balli, Faruk & Basher, Syed Abul & Jean Louis, Rosmy, 2013. "Sectoral equity returns and portfolio diversification opportunities across the GCC region," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 33-48.
  8. Horvath Roman & Poldauf Petr, 2012. "International Stock Market Comovements: What Happened during the Financial Crisis?," Global Economy Journal, De Gruyter, vol. 12(1), pages 1-21, March.
  9. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  10. Kate Phylaktis & Lichuan Xia, 2009. "Equity Market Comovement and Contagion: A Sectoral Perspective," Financial Management, Financial Management Association International, vol. 38(2), pages 381-409, 06.
  11. Aloui, Chaker & Hkiri, Besma, 2014. "Co-movements of GCC emerging stock markets: New evidence from wavelet coherence analysis," Economic Modelling, Elsevier, vol. 36(C), pages 421-431.
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