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Looking at new markets for international diversification: frontier markets

Author

Listed:
  • Aswini Sukumaran
  • Rakesh Gupta
  • Thadavilil Jithendranathan

Abstract

Purpose - – The purpose of this paper is to examine whether there exist significant benefits from diversification into frontier markets for an Australian investor in comparison to a US investor. Design/methodology/approach - – The study uses the computationally efficient ADCC GARCH model to estimate time-varying correlations of returns. The authors also compare the results to DCC GARCH correlations in order to test whether the results are model-specific. Optimal portfolios with several restrictions were constructed and the results from Australian and US investors were compared. The study also uses a holding out period that is rebalanced at the end of each quarter using new portfolio weights. Findings - – The study finds that there are significant benefits for the Australian investor from diversifying into frontier markets. However, the benefits to the US investor are much higher than that of an Australian investor. The results from the holding out period also present significantly higher benefits to the US investor compared to the Australian investor. Originality/value - – This study examines the diversification benefits to the Australian investor from frontier markets and compares the benefits of the Australian and the US investors. The results emphasise the potential benefits from including frontier markets in the portfolio. The paper also presents a holding out period analysis.

Suggested Citation

  • Aswini Sukumaran & Rakesh Gupta & Thadavilil Jithendranathan, 2015. "Looking at new markets for international diversification: frontier markets," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 11(1), pages 97-116, February.
    • Handle: RePEc:eme:ijmfpp:v:11:y:2015:i:1:p:97-116
    DOI: 10.1108/IJMF-05-2013-0057
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    Citations

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    Cited by:

    1. Sudharshan Reddy Paramati & Rakesh Gupta & Kishore Tandon, 2016. "Dynamic analysis of time-varying correlations and cointegration relationship between Australia and frontier equity markets," International Journal of Business and Emerging Markets, Inderscience Enterprises Ltd, vol. 8(2), pages 121-145.
    2. Imtiaz Arif, Ather Iqbal, Syed Farasat Ali, Amna Sohail, 2017. "International Stock Market Diversification among BRICS-P: A Cointegration Analysis," Journal of Management Sciences, Geist Science, Iqra University, Faculty of Business Administration, vol. 4(2), pages 269-285, October.
    3. Hourani, Alya & Wang, Yan & Demiralay, Sercan & McGroarty, Frank, 2023. "Industry costs of equity: Evidence from frontier markets," International Review of Financial Analysis, Elsevier, vol. 87(C).
    4. Amanjot Singh & Manjit Singh, 2018. "Co-movement among US, Frontier and BRIC Equity Markets after the Financial Crisis," Global Business Review, International Management Institute, vol. 19(2), pages 311-327, April.
    5. Cagliesi, Gabriella & Guidi, Francesco, 2021. "A three-tiered nested analytical approach to financial integration: The case of emerging and frontier equity markets," International Review of Financial Analysis, Elsevier, vol. 74(C).
    6. ATM Adnan & Sameer Al Johani, 2023. "Stock Market Reaction to COVID-19: A Cross-Sectional Industry Analysis in Frontier Market," IIM Kozhikode Society & Management Review, , vol. 12(2), pages 157-181, July.
    7. 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.
    8. Beini Guo & Oyakhilome Ibhagui, 2019. "China–Africa stock market linkages and the global financial crisis," Journal of Asset Management, Palgrave Macmillan, vol. 20(4), pages 301-316, July.

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