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Portfolio diversification between developed and developing stock markets: The case of US and UK investors in Nigeria

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  • Oloko, Tirimisiyu F.

Abstract

This study investigates the availability of potential portfolio diversification benefits for US and UK investors diversifying equity portfolio with Nigerian stocks. It employs VAR-BEKK-GARCH model and utilizes conditional variance and covariance from the model to estimate optimal portfolio weight (OPW) and optimal hedging ratio (OHR) to examine optimal portfolio management options in case of financial risk from developed stock markets. Its main contributions are: (i) it examines the case of Nigeria, which is one of the countries attracting the largest share of foreign investment in Africa (ii) it identifies and accounts for structural break in empirical model for international portfolio diversification; omission of which could cause biasness of result. Evidence from this study shows that there are potential gains for US and UK investors diversifying equity portfolio with Nigerian stocks, and there are potential effects for financial risk or financial bubble to transmit from US and UK stock markets to Nigerian stock market. Further evidence from OPW and OHR results show that US (UK) investor could minimize the effect of financial shocks from US (UK) stock market on his Nigeria – US (UK) equity portfolio by holding about 10% (25%), and taking short position of about 9.4 cent (16.6 pence), in Nigerian stocks.

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  • Oloko, Tirimisiyu F., 2018. "Portfolio diversification between developed and developing stock markets: The case of US and UK investors in Nigeria," Research in International Business and Finance, Elsevier, vol. 45(C), pages 219-232.
    • Handle: RePEc:eee:riibaf:v:45:y:2018:i:c:p:219-232
    DOI: 10.1016/j.ribaf.2017.07.153
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    2. Reis, Pedro Nogueira & Pinto, António Pedro Soares, 2024. "Unlocking portfolio resilient and persistent risk: A holistic approach to unveiling potential grounds," The North American Journal of Economics and Finance, Elsevier, vol. 73(C).
    3. Belhassine, Olfa, 2020. "Volatility spillovers and hedging effectiveness between the oil market and Eurozone sectors: A tale of two crises," Research in International Business and Finance, Elsevier, vol. 53(C).
    4. Afees A. Salisu & Rangan Gupta & Ahamuefula E. Ogbonna, 2022. "A moving average heterogeneous autoregressive model for forecasting the realized volatility of the US stock market: Evidence from over a century of data," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 384-400, January.
    5. Salisu, Afees A. & Swaray, Raymond & Oloko, Tirimisiyu F., 2019. "Improving the predictability of the oil–US stock nexus: The role of macroeconomic variables," Economic Modelling, Elsevier, vol. 76(C), pages 153-171.
    6. Afees Adebare Salisu & Raymond Swaray & Tirimisiyu Oloko, 2017. "US stocks in the presence of oil price risk: Large cap vs. Small cap," Economics and Business Letters, Oviedo University Press, vol. 6(4), pages 116-124.
    7. Aluko Olufemi Adewale & Adeyeye Patrick Olufemi & Migiro Stephen Oseko, 2017. "Modelling Volatility Persistence and Asymmetry with Structural Break: Evidence from the Nigerian Stock Market," Journal of Economics and Behavioral Studies, AMH International, vol. 8(6), pages 153-160.
    8. Salisu, Afees A. & Adediran, Idris A. & Oloko, Tirimisiyu O. & Ohemeng, William, 2020. "The heterogeneous behaviour of the inflation hedging property of cocoa," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    9. Boako, Gideon & Alagidede, Paul, 2018. "African stock markets in the midst of the global financial crisis: Recoupling or decoupling?," Research in International Business and Finance, Elsevier, vol. 46(C), pages 166-180.
    10. Tumala, Mohammed M. & Salisu, Afees A. & Gambo, Ali I., 2023. "Disentangled oil shocks and stock market volatility in Nigeria and South Africa: A GARCH-MIDAS approach," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 707-717.
    11. Thomas, Nisha Mary & Kashiramka, Smita & Yadav, Surendra Singh & Paul, Justin, 2022. "Role of emerging markets vis-à-vis frontier markets in improving portfolio diversification benefits," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 95-121.
    12. Mutiu A. Oyinlola & Tirimisyu F. Oloko, 2018. "Exchange rate dynamics and stock market performance in Nigeria: Evidence from a Nonlinear ARDL Approach," Working Papers 059, Centre for Econometric and Allied Research, University of Ibadan.

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    More about this item

    Keywords

    C4; C52; F21; Portfolio diversification; Stock markets; US and UK investors; VAR-BEKK-GARCH model; Structural break; Portfolio management;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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