Time-varying Correlations and Optimal Allocation in Emerging Market Equities for Australian Investors

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Author(s)
Cha, Heung-Joo
Jithendranathan, Thadavillil
Griffith University Author(s)
Year published
2009
Metadata
Show full item recordAbstract
Australian investors can reduce their overall portfolio risk by diversifying into equities from other markets. Emerging markets are of interest because of the low correlations with Australian equity market returns. However, several studies have indicated that correlations between equity returns are increasing over time, and using unconditional estimates of correlations in a portfolio optimisation model can result in less than optimal portfolio weights. We use an Asymmetric Dynamic Conditional Correlation GARCH model to estimate time-varying correlations and incorporate these correlation estimates into the portfolio optimisation ...
View more >Australian investors can reduce their overall portfolio risk by diversifying into equities from other markets. Emerging markets are of interest because of the low correlations with Australian equity market returns. However, several studies have indicated that correlations between equity returns are increasing over time, and using unconditional estimates of correlations in a portfolio optimisation model can result in less than optimal portfolio weights. We use an Asymmetric Dynamic Conditional Correlation GARCH model to estimate time-varying correlations and incorporate these correlation estimates into the portfolio optimisation model. The assets used for portfolio construction comprise seven emerging market indexes that are available for investment to foreign investors. The study finds that, despite increasing correlations, there are still potential benefits in international diversification into emerging markets for Australian investors.
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View more >Australian investors can reduce their overall portfolio risk by diversifying into equities from other markets. Emerging markets are of interest because of the low correlations with Australian equity market returns. However, several studies have indicated that correlations between equity returns are increasing over time, and using unconditional estimates of correlations in a portfolio optimisation model can result in less than optimal portfolio weights. We use an Asymmetric Dynamic Conditional Correlation GARCH model to estimate time-varying correlations and incorporate these correlation estimates into the portfolio optimisation model. The assets used for portfolio construction comprise seven emerging market indexes that are available for investment to foreign investors. The study finds that, despite increasing correlations, there are still potential benefits in international diversification into emerging markets for Australian investors.
View less >
Conference Title
INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS
Volume
14
Issue
2
Publisher URI
Copyright Statement
© The Author(s) 2008. The attached file is reproduced here in accordance with the copyright policy of the publisher. For information about this conference please refer to the conference's website or contact the author.
Subject
Banking, finance and investment
Investment and risk management