Benefits of diversifying investments into emerging markets with time-varying correlations : an Australian perspective

Rakesh Gupta, Gabriel D. Donleavy

    Research output: Contribution to journalArticle

    57 Citations (Scopus)

    Abstract

    Australian investors can reduce their overall portfolio risk by diversifying into equities from other markets. Emerging markets have attracted significant interest because of their low correlations with Australian equity market returns; however, a number of studies have indicated that correlations between equity returns are increasing over time, so using unconditional estimates of correlations in a portfolio optimization model can result in the selection of a portfolio that may not be optimal. We use an Asymmetric Dynamic Conditional Correlation GARCH model to estimate time-varying correlations and include these correlation estimates in the portfolio optimization model. The assets used for portfolio construction comprise seven emerging market indices that are available to foreign investors. This study finds that, despite increasing correlations, there are still potential benefits for Australian investors who diversify into international emerging markets.
    Original languageEnglish
    Number of pages18
    JournalJournal of Multinational Financial Management
    VolumeVol. 19\, no. 2\, pp. 160-177
    Publication statusPublished - 2009

    Keywords

    • Australia
    • emerging markets
    • emerging stock markets
    • investment analysis
    • investments
    • investments, foreign
    • portfolio management
    • stock exchanges
    • stockholders
    • stocks

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