Looking at new markets for international diversification: frontier markets
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 2 February 2015
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.
Keywords
Citation
Sukumaran, A., Gupta, R. and Jithendranathan, T. (2015), "Looking at new markets for international diversification: frontier markets", International Journal of Managerial Finance, Vol. 11 No. 1, pp. 97-116. https://doi.org/10.1108/IJMF-05-2013-0057
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited