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Nonparametric approach to portfolio diversification: the case of Australian equity market

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  • Trofimov, Ivan D.

Abstract

This study investigates the portfolio diversification possibilities among Australian sectoral, size and style indexes and between Australian aggregate equity index and selected international indexes. Two analytical methods are used – nonparametric cointegration that appears to be the most appropriate for the financial data analysis, and principal component analysis (PCA) that is suitable for detecting relations among a large number of variables and for clustering co-moving variables. Having identified linear and non-linear unit roots in the time series data we show that based on Bierens’ nonparametric cointegration the number of cointegrating relations between respective indexes increases (and the portfolio diversification opportunities diminish) in the post-GFC period (2007-2012) relative to the historic average (1992-2012). Regarding sectoral diversification, the PCA results suggest that sectoral relations underwent minor changes in the post-GFC period with few additional diversification opportunities appearing.

Suggested Citation

  • Trofimov, Ivan D., 2013. "Nonparametric approach to portfolio diversification: the case of Australian equity market," MPRA Paper 79562, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:79562
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    References listed on IDEAS

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    More about this item

    Keywords

    Nonparametric cointegration; principal component analysis; portfolio diversification; non-linear unit root.;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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