Does Integration in the Asian Frontier, Emerging, and Developed Stock Markets Conceal a Hidden Opportunity for Portfolio Diversification?

Abstract

In the current scenario where Asian markets are growing at an enormous rate, they present a lucrative opportunity for investors to reap better rewards. However, the steep rise in the interdependencies of the markets within the Asian belt has made the investment scenario complex for investors. This study examines the integrated behavior of frontier, emerging, and developed stock markets in Asia. The study used unconditional correlation analysis and a VAR framework for the period ranging from August 1, 2000, to March 31, 2019. In the course of the study, it emerged that the high-level integration between emerging and developed stock markets in this region creates an unfavorable landscape for portfolio diversification. However, there remains an exciting opportunity with safe asset allocation strategies to derive diversification benefits by investing in dynamic and surging Asian frontier stock markets.

TOPICS: Exchanges/markets/clearinghouses, developed markets, VAR and use of alternative risk measures of trading risk, portfolio construction

Key Findings

• ▪ The extent of integration between the Asian emerging and developed stock markets has increased and gained greater momentum with the episode of the Global Financial Crisis (GFC). Therefore, there is little/no scope left for portfolio diversification.

• ▪ In the journey of wealth creation, portfolio investors can concentrate on Asian frontier markets to diversify their portfolio, due to the low integration of these markets with Asian developed and emerging stock markets.

• ▪ The influencing role of Asian developed markets on emerging stock markets has grown predominant since the GFC. But the notion that developed markets dominate small markets does not hold true in the case of Asian frontier stock markets.