Volatility, Time Varying Correlations and International Portfolio Diversification: An Empirical Study of Australia and Emerging Stock markets

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Author(s)
Gupta, R.
Mollik, A. T.
Griffith University Author(s)
Year published
2008
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This paper examines the changing correlations between the equity returns of Australia and the emerging equity markets and the tests the volatility, as a factor, that may cause the correlations to change over time. Linear regression estimates of Asymmetric Dynamic Conditional Correlation Model, which allows correlations to change, have been used to test if the volatilities of individual markets or their relative volatility causes the change in correlations. The results suggest that the correlations between Australia's equity return and emerging markets' equity returns, represented by the respective market index returns, ...
View more >This paper examines the changing correlations between the equity returns of Australia and the emerging equity markets and the tests the volatility, as a factor, that may cause the correlations to change over time. Linear regression estimates of Asymmetric Dynamic Conditional Correlation Model, which allows correlations to change, have been used to test if the volatilities of individual markets or their relative volatility causes the change in correlations. The results suggest that the correlations between Australia's equity return and emerging markets' equity returns, represented by the respective market index returns, change over time and the variation in correlations is influenced by the volatility of the emerging market returns. In some cases, the relative volatility of the markets, the ratio of emerging market volatility to the volatility of the Australian market, is found to influence the change in correlations. The relationship between the correlations and the volatilities is stronger in some country pairs (with Brazil, Chile, India, Malaysia and Philippines) and very weak for Sri Lanka and Turkey.
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View more >This paper examines the changing correlations between the equity returns of Australia and the emerging equity markets and the tests the volatility, as a factor, that may cause the correlations to change over time. Linear regression estimates of Asymmetric Dynamic Conditional Correlation Model, which allows correlations to change, have been used to test if the volatilities of individual markets or their relative volatility causes the change in correlations. The results suggest that the correlations between Australia's equity return and emerging markets' equity returns, represented by the respective market index returns, change over time and the variation in correlations is influenced by the volatility of the emerging market returns. In some cases, the relative volatility of the markets, the ratio of emerging market volatility to the volatility of the Australian market, is found to influence the change in correlations. The relationship between the correlations and the volatilities is stronger in some country pairs (with Brazil, Chile, India, Malaysia and Philippines) and very weak for Sri Lanka and Turkey.
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Journal Title
International Research Journal of Finance and Economics
Volume
18
Publisher URI
Copyright Statement
© 2008 EuroJournals Publishing, Inc. The attached file is reproduced here in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
Subject
Investment and Risk Management
Applied Economics
Econometrics
Banking, Finance and Investment