Dynamic Analysis of Time-Varying Correlations and Cointegration Relationship between Australia and Frontier Equity Markets

31 Pages Posted: 22 Aug 2013

See all articles by Sudharshan Reddy Paramati

Sudharshan Reddy Paramati

University of Dundee; affiliation not provided to SSRN

Rakesh Gupta

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

Kishore Tandon

CUNY Baruch College - Zicklin School of Business

Date Written: August 19, 2013

Abstract

This paper aims to demonstrate to what extent Australian stock market is correlated with those of eighteen frontier markets of five different regions. We also investigate the long-run relationship between these markets. The empirical analysis is carried out on the weekly closing price data of broad market indices of respective stock markets. Empirical results of AGDCC GARCH model reveal that the correlations of Australian stock market with frontier markets are changing over time. Results show that Australian stock market has weak correlations with all the frontier markets. Further, our analysis confirms that the affect of GFC on the correlations of Australia and frontier markets are limited to only few markets where correlations increased to some extent. Results also demonstrate that the GFC has no influence on the correlations of Australia and frontier markets of Asia. The cointegration test results display that there is no evidence of long-run relationship between Australia and frontier markets. Similarly, Granger causality test results show that Australian stock market drives some of frontier markets and no evidence of reverse causality from these markets to Australia. The causality results also show that the only Trinidad & Tobago market influences the Australian stock market. 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 global investors can diversify their portfolios into these frontier markets for gaining higher risk-adjusted returns. Our study also contributes to the body of knowledge by addressing the issue of stock markets linkage between developed and frontier markets and also the GFC.

Keywords: G01, G11, G15

JEL Classification: Correlations, Cointegration Relationship, Frontier Markets, Global financial crisis

Suggested Citation

Paramati, Sudharshan Reddy and Gupta, Rakesh and Tandon, Kishore, Dynamic Analysis of Time-Varying Correlations and Cointegration Relationship between Australia and Frontier Equity Markets (August 19, 2013). Available at SSRN: https://ssrn.com/abstract=2312551 or http://dx.doi.org/10.2139/ssrn.2312551

Sudharshan Reddy Paramati (Contact Author)

University of Dundee ( email )

Dundee, Scotland DD1 4HN
United Kingdom
0138284845 (Phone)
DD1 4HN (Fax)

affiliation not provided to SSRN

Rakesh Gupta

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia
+61 7 37357593 (Phone)
+61 7 3735 3719 (Fax)

CQ University ( email )

B-33, G-26
Fabie
North Rockhampton, QLD 4701
Australia
+61 7 4930 9158 (Phone)

Association of Personal Finance and Investments

Bruce Highway
Rockhampton
Australia
61749309158 (Phone)

Kishore Tandon

CUNY Baruch College - Zicklin School of Business ( email )

55 Lexington Avenue
New York, NY 10010
United States
(646) 312-3468 (Phone)
(646) 312-3451 (Fax)

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