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

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. 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 in this study. Further, our analysis confirms that the effects of the GFC on correlations of Australia and frontier markets are limited to only few frontier markets where correlations are slightly increased. 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. 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. Our study also contributes to the body of knowledge by addressing the issue of stock market linkages between developed and frontier markets and also the GFC.

Volatility in frontier markets: a Multivariate GARCH analysis

“…This may lead to a higher risk associated with the investments made in these markets. It is observed that the results of the present study are similar to the results given by Todorov and Bidarkota (2012), Oikonomikou (2015) and Ur Rehman and Kashif (2018), while these results are contradictory to the conclusion given by Paramati et al (2016).…”

“…Paramati et al (2016) also used Asymmetric Generalized Dynamic Conditional Correlations (AGDCC)–GARCH, Johansen’s cointegration test and Granger causality test to analyze the volatility and long-term relationship among the Australian stock market and 18 frontier markets from five different geographic regions. For this purpose, weekly data from July 1996 to August 2012 were analyzed.…”

The effects of volatility and changes in conditional correlations in the stock markets of Russia and developed countries

“…The general results show that oneway and two-way relationships exist between the variables and the DCC model coefficients show that there is significant interdependence of all indices, except for the Hang Seng, Shanghai, and S&P 500. Paramati et al (2016) examine how the Australian stock market correlates with eighteen border markets in five different regions. The empirical results of the AGDCC-GARCH model show that the correlation of the Australian stock market and the border markets changes over time and that Australia has a weak correlation with all border markets.…”