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  • Benefits of Diversifying Investments into Emerging Markets with Time-varying Correlations: An Australian Perspective

    Author(s)
    Gupta, R
    Donleavy, GD
    Griffith University Author(s)
    Gupta, Rakesh
    Year published
    2009
    Metadata
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    Abstract
    Australian investors can reduce their overall portfolio risk by diversifying into equities from other markets. Emerging markets have attracted significant interest because of their low correlations with Australian equity market returns; however, a number of studies have indicated that correlations between equity returns are increasing over time, so using unconditional estimates of correlations in a portfolio optimization model can result in the selection of a portfolio that may not be optimal. We use an Asymmetric Dynamic Conditional Correlation GARCH model to estimate time-varying correlations and include these ...
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    Australian investors can reduce their overall portfolio risk by diversifying into equities from other markets. Emerging markets have attracted significant interest because of their low correlations with Australian equity market returns; however, a number of studies have indicated that correlations between equity returns are increasing over time, so using unconditional estimates of correlations in a portfolio optimization model can result in the selection of a portfolio that may not be optimal. We use an Asymmetric Dynamic Conditional Correlation GARCH model to estimate time-varying correlations and include these correlation estimates in the portfolio optimization model. The assets used for portfolio construction comprise seven emerging market indices that are available to foreign investors. This study finds that, despite increasing correlations, there are still potential benefits for Australian investorswhodiversify into international emerging markets.
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    Journal Title
    Journal of Multinational Financial management
    Volume
    19
    Issue
    20
    DOI
    https://doi.org/10.1016/j.mulfin.2008.10.001
    Subject
    Banking, finance and investment
    Investment and risk management
    Publication URI
    http://hdl.handle.net/10072/37873
    Collection
    • Journal articles

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