Volatility, Time Varying Correlation and International Portfolio Diversification: An Empirical Study of Australia and Emerging Markets

International Research Journal of Finance and Economics, Vol. 18, 2008

20 Pages Posted: 21 Aug 2010

See all articles by Rakesh Gupta

Rakesh Gupta

Griffith University - Griffith Business School; CQ University; Association of Personal Finance and Investments

A. T. Mollik

Faculty of Business & Government, UC

Date Written: August 1, 2008

Abstract

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.

JEL Classification: F37, F21, G11, G15

Suggested Citation

Gupta, Rakesh and Mollik, Abu Taher, Volatility, Time Varying Correlation and International Portfolio Diversification: An Empirical Study of Australia and Emerging Markets (August 1, 2008). International Research Journal of Finance and Economics, Vol. 18, 2008, Available at SSRN: https://ssrn.com/abstract=1395068

Rakesh Gupta (Contact Author)

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia
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CQ University ( email )

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Association of Personal Finance and Investments

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Abu Taher Mollik

Faculty of Business & Government, UC ( email )

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Canberra, Bruce Campus, ACT 2617
Australia
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+61 2 62015238 (Fax)

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