Dynamic Analysis of Time-Varying Correlations and Cointegration Relationship between Australia and Frontier Equity Markets
31 Pages Posted: 22 Aug 2013
Date Written: August 19, 2013
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
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