Dynamic Analysis of Time-Varying Correlations and Cointegration Relationship between Australia and Frontier Equity Markets

Paramati, Sudharshan Reddy and Gupta, Rakesh and Tandon, Kishore (2016): Dynamic Analysis of Time-Varying Correlations and Cointegration Relationship between Australia and Frontier Equity Markets. Published in: International Journal of Business and Emerging Markets , Vol. 8, No. 2 (1 May 2016): pp. 121-145.

Abstract

This paper aims to demonstrate to what extent Australian stock market is correlated with those of eighteen 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 in this study. Further, our analysis confirms that the effects of the GFC on correlations of Australia and frontier markets are limited to only few frontier markets where correlations are slightly increased. The cointegration test results display that there is no evidence of long-run relationship between Australia and frontier markets. Similarly, Granger causality test results show that Australian stock market drives some of frontier markets and no evidence of reverse causality from these markets to Australia. 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. Our study also contributes to the body of knowledge by addressing the issue of stock market linkages between developed and frontier markets and also the GFC.

• Item Type: MPRA Paper
• Language: English
• Keywords: Conditional correlations, frontier markets, global financial crisis
• Subjects: G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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