Title: Dynamic analysis of time-varying correlations and cointegration relationship between Australia and frontier equity markets

Authors: Sudharshan Reddy Paramati; Rakesh Gupta; Kishore Tandon

Addresses: Department of Accounting, Finance and Economics, Griffith Business School, Griffith University, Brisbane, Queensland-4111, Australia ' Department of Accounting, Finance and Economics, Griffith Business School, Griffith University, Brisbane, Queensland-4111, Australia; Chongyang Institute of Financial Studies, Renmin University, Beijing, China ' Zicklin School of Business, Baruch College, The City University of New York, New York 10010, USA

Abstract: This paper aims to demonstrate to what extent Australian stock market is correlated with those of 18 frontier markets of five different regions. We also investigate the long-run relationship between these markets. Empirical results of AGDCC GARCH model reveal that the correlations of Australian stock market with those of frontier markets are changing over time. Results show that Australia has weak correlations with all the frontier markets that are considered. Further, our analysis confirms that the effect of the GFC on stock markets' interdependence is limited to only few markets. The cointegration test results display that there is no evidence of long-run relationship between Australia and frontier markets. Empirical findings of our study suggest that Australian stock market is weakly correlated with those of frontier markets. Therefore, our study findings suggest that the Australian investors can diversify their portfolios into these frontier markets for gaining higher risk-adjusted returns.

Keywords: conditional correlations; frontier markets; global financial crisis; dynamic analysis; time-varying correlations; cointegration relationship; Australia; equity markets; stock markets; AGDCC GARCH; market interdependence; portfolio diversification; investment portfolios; risk-adjusted returns.

DOI: 10.1504/IJBEM.2016.076597

International Journal of Business and Emerging Markets, 2016 Vol.8 No.2, pp.121 - 145

Received: 10 Feb 2015
Accepted: 19 May 2015
Published online: 17 May 2016 *

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