Evidence of cross-country portfolio diversification benefits: The case of Saudi Arabia

Ali, Hakim and Masih, Mansur (2016): Evidence of cross-country portfolio diversification benefits: The case of Saudi Arabia.

Abstract

Recent literature draw attention to the issue whether the time-varying correlation and the heterogeneity in investment horizons has an effect on investor’s return. Earlier studies investigated the interdependence of Saudi Arabian Stock market with its major trading partners without taking care of the time-varying correlation and different investments horizons of the investors. We make the initial attempt to study the extent to which investors can benefit from portfolio diversification with the Shariah indices of the major trading partners (United States, China, Japan, Germane, India), using Saudi Arabia as a case study where investors recently suffered due to downward trend of oil price. In order to investigate that, the pertinent timevarying and time horizon techniques like, Multivariate GARCH-DCC, the continuous wavelet transform (CWT) and the maximal overlap discrete wavelet transform (MODWT) are applied. Our findings tend to indicate that the Saudi Arabian investors have portfolio diversification benefits with all major trading partners in the short investment horizon, However in the long run, all markets are correlated yielding minimum portfolio diversification benefits and more importantly Saudi Arabian Investors have portfolio diversification benefits with Indian Islamic equity market in almost all investment horizons.

• Item Type: MPRA Paper
• Language: English
• Keywords: portfolio diversification, Sharia (Islamic) indices, GARCH-DCC, Wavelets
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

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