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Should investors diversify their portfolios with stocks from major trading countries? A comparative multivariate GARCH-DCC and wavelet correlation analysis


  • Dwihasri, Dhaifina
  • Masih, Mansur


The existing literature have evaluated the performance of stock markets without taking into account the time-varying correlations and different investment horizons of the investors. The present paper attempts to investigate to what extent the Indonesian sharia stock returns can earn portfolio diversification benefits if they are trading with sharia stocks from its major trading partners (China, Japan, United States). The recent Multivariate GARCH Dynamic Conditional Correlation, the Continuous Wavelet Transform and the Maximal Overlap Discrete Wavelet are applied. Our findings tend to indicate that the Indonesian investors may not enjoy portfolio diversification benefits in all investment horizons if investing in China as better investment opportunities are available by investing in Japan and United States. However, in the long run all markets are highly correlated yielding minimal portfolio diversification benefits.

Suggested Citation

  • Dwihasri, Dhaifina & Masih, Mansur, 2015. "Should investors diversify their portfolios with stocks from major trading countries? A comparative multivariate GARCH-DCC and wavelet correlation analysis," MPRA Paper 65278, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:65278

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    References listed on IDEAS

    1. Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 3-26, February.
    2. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    3. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    4. Cheol S. Eun & Bruce G. Resnick, 1994. "International Diversification of Investment Portfolios: U.S. and Japanese Perspectives," Management Science, INFORMS, vol. 40(1), pages 140-161, January.
    5. Chowdhury, Mamta B., 2005. "Trade Reforms and Economic Integration in South Asia: SAARC to SAPTA," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 5(4).
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    More about this item


    Islamic stocks; portfolio diversification; MGARCH-DCC; Wavelets;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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