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POTENTIAL FOR THE PORTFOLIO DIVERSIFICATION IN EMERGING MARKETS: A SURVEY OF EMPIRICAL EVIDENCE

Year 2021, Volume: 25 Issue: 1, 19 - 45, 30.06.2021
https://doi.org/10.51945/cuiibfd.862019

Abstract

Finding diversification opportunities in emerging markets presents continuous challenge for international investors. This is the case because diversification opportunities in emerging markets change as a result of change in the expected level, dynamics and direction of cross-country, cross-area and cross-assets correlations, as well as the expected (dis)appearance of volatility transmission across countries and areas. In order to provide the most up-to-date evidence on potential for the portfolio diversification in emerging markets, the author will use recent literature. According to the author’s findings, potential for portfolio diversification still exists in all emerging markets areas and the majority of individual emerging markets around the world. Additionally, portfolio diversification in different segments of an emerging financial market can also be beneficial to international investors. Due to the variability of key preconditions for international portfolio diversification, investors should frequently adjust their portfolio positions.

References

  • Abbas, Q., Khan, S., & Shah, S. Z. A. (2013). Volatility transmission in regional Asian stock markets. Emerging Markets Review, 16, 66-77. https://doi.org/10.1016/j.ememar.2013.04.004
  • Abbes, M. B., & Trichilli, Y. (2015). Islamic stock markets and potential diversification benefits. Borsa Istanbul Review, 15(2), 93-105. https://doi.org/10.1016/j.bir.2015.03.001
  • Al Nasser, O. M., & Hajilee, M. (2016). Integration of emerging stock markets with global stock markets. Research in International Business and Finance, 36, 1-12. https://doi.org/10.1016/j.ribaf.2015.09.025
  • Aluko, O. A., Fapetu, O., & Azeez, B. A. (2018). International portfolio diversification in the Nigerian stock market: A global financial crisis perspective. Future Business Journal, 4(2), 189-194. https://doi.org/10.1016/j.fbj.2018.06.001
  • Arouri, M. E. H., Nguyen, D. K., & Pukthuanthong, K. (2012). An international CAPM for partially integrated markets: Theory and empirical evidence. Journal of Banking & Finance, 36(9), 2473-2493. https://doi.org/10.1016/j.jbankfin.2012.05.004
  • Basu, A. K., & Huang-Jones, J. (2015). The performance of diversified emerging market equity funds. Journal of International Financial Markets, Institutions and Money, 35, 116-131. https://doi.org/10.1016/j.intfin.2015.01.002
  • Bekaert, G., & Harvey, C. R. (2017). Emerging equity markets in a globalizing world. Netspar Discussion Papers, DP 05/2014-024. Available at SSRN: https://ssrn.com/abstract=2344817 or http://dx.doi.org/10.2139/ssrn.2344817
  • Bekiros, S., Boubaker, S., Nguyen, D. K., & Uddin, G. S. (2017). Black swan events and safe havens: The role of gold in globally integrated emerging markets. Journal of International Money and Finance, 73, 317-334. https://doi.org/10.1016/j.jimonfin.2017.02.010
  • Bhuiyan, R. A., Rahman, M. P., Saiti, B., & Ghani, G. B. M. (2019). Does the Malaysian Sovereign sukuk market offer portfolio diversification opportunities for global fixed-income investors? Evidence from wavelet coherence and multivariate-GARCH analyses. The North American Journal of Economics and Finance, 47, 675-687. https://doi.org/10.1016/j.najef.2018.07.008
  • Briere, M., Oosterlinck, K., & Szafarz, A. (2015). Virtual currency, tangible return: Portfolio diversification with bitcoin. Journal of Asset Management, 16(6), 365-373. https://doi.org/10.1057/jam.2015.5
  • Carrick, J. (2016). Bitcoin as a complement to emerging market currencies. Emerging Markets Finance and Trade, 52(10), 2321-2334. https://doi.org/10.1080/1540496X.2016.1193002
  • Christoffersen, P., Errunza, V., Jacobs, K., & Jin, X. (2014). Correlation dynamics and international diversification benefits. International Journal of Forecasting, 30(3), 807-824. https://doi.org/10.1016/j.ijforecast.2014.01.001
  • Christoffersen, P., Errunza, V., Jacobs, K., & Langlois, H. (2012). Is the potential for international diversification disappearing? A dynamic copula approach. The Review of Financial Studies, 25(12), 3711-3751. https://doi.org/10.1093/rfs/hhs104
  • Das, D., Kannadhasan, M., & Bhattacharyya, M. (2019). Do the emerging stock markets react to international economic policy uncertainty, geopolitical risk and financial stress alike?. The North American Journal of Economics and Finance, 48, 1-19. https://doi.org/10.1016/j.najef.2019.01.008
  • Donadelli, M., & Persha, L. (2014). Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty. Research in International Business and Finance, 30, 284-309. https://doi.org/10.1016/j.ribaf.2013.09.008
  • Eisl, A., Gasser, S., & Weinmayer, K. (2015). Caveat emptor: Does Bitcoin improve portfolio diversification?. Available at SSRN: https://ssrn.com/abstract=2408997 or http://dx.doi.org/10.2139/ssrn.2408997
  • Gad, S., & Andrikopoulos, P. (2019). Diversification benefits of Shari'ah compliant equity ETFs in emerging markets. Pacific-Basin Finance Journal, 53, 133-144. https://doi.org/10.1016/j.pacfin.2018.10.009
  • Graham, M., Kiviaho, J., & Nikkinen, J. (2012). Integration of 22 emerging stock markets: A three-dimensional analysis. Global Finance Journal, 23(1), 34-47. https://doi.org/10.1016/j.gfj.2012.01.003
  • Guesmi, K., Saadi, S., Abid, I., & Ftiti, Z. (2019). Portfolio diversification with virtual currency: Evidence from bitcoin. International Review of Financial Analysis, 63, 431-437. https://doi.org/10.1016/j.irfa.2018.03.004
  • Guidi, F., & Ugur, M. (2014). An analysis of South-Eastern European stock markets: Evidence on cointegration and portfolio diversification benefits. Journal of International Financial Markets, Institutions and Money, 30, 119-136. https://doi.org/10.1016/j.intfin.2014.01.007
  • Gupta, R., & Guidi, F. (2012). Cointegration relationship and time varying co-movements among Indian and Asian developed stock markets. International Review of Financial Analysis, 21, 10-22. https://doi.org/10.1016/j.irfa.2011.09.001
  • Hadhri, S., & Ftiti, Z. (2019). Asset allocation and investment opportunities in emerging stock markets: Evidence from return asymmetry-based analysis. Journal of International Money and Finance, 93, 187-200. https://doi.org/10.1016/j.jimonfin.2019.01.002
  • Kellner, R., & Rösch, D. (2019). A country specific point of view on international diversification. Journal of International Money and Finance, 98, 102064-102076. https://doi.org/10.1016/j.jimonfin.2019.102064
  • Koepke, R. (2019). What drives capital flows to emerging markets? A survey of the empirical literature. Journal of Economic Surveys, 33(2), 516-540. https://doi.org/10.1111/joes.12273
  • Majdoub, J., & Mansour, W. (2014). Islamic equity market integration and volatility spillover between emerging and US stock markets. The North American Journal of Economics and Finance, 29, 452-470. https://doi.org/10.1016/j.najef.2014.06.011
  • Mensah, J. O., & Alagidede, P. (2017). How are Africa's emerging stock markets related to advanced markets? Evidence from copulas. Economic Modelling, 60, 1-10. https://doi.org/10.1016/j.econmod.2016.08.022
  • Mensi, W., Hammoudeh, S., & Kang, S. H. (2017). Risk spillovers and portfolio management between developed and BRICS stock markets. The North American Journal of Economics and Finance, 41, 133-155. https://doi.org/10.1016/j.najef.2017.03.006
  • Mensi, W., Hammoudeh, S., Reboredo, J. C., & Nguyen, D. K. (2014). Do global factors impact BRICS stock markets? A quantile regression approach. Emerging Markets Review, 19, 1-17. https://doi.org/10.1016/j.ememar.2014.04.002
  • Mensi, W., Shahzad, S. J. H., Hammoudeh, Zeitun, S. R., & Rehma, M. U. (2017). Diversification potential of Asian frontier, BRIC emerging and major developed stock markets: A wavelet-based value at risk approach. Emerging Markets Review, 32, 130-147. https://doi.org/10.1016/j.ememar.2017.06.002
  • Miyajima, K., Mohanty, M. S., & Chan, T. (2015). Emerging market local currency bonds: diversification and stability. Emerging Markets Review, 22, 126-139. https://doi.org/10.1016/j.ememar.2014.09.006
  • Najeeb, S. F., Bacha, O., & Masih, M. (2015). Does heterogeneity in investment horizons affect portfolio diversification? Some insights using M-GARCH-DCC and wavelet correlation analysis. Emerging Markets Finance and Trade, 51(1), 188-208. https://doi.org/10.1080/1540496X.2015.1011531
  • Narayana, S., & Rehman, M. U. (2017). Diversification opportunities between emerging and frontier Asian (EFA) and developed stock markets. Finance Research Letters, 23, 223-232. https://doi.org/10.1016/j.frl.2017.06.007
  • Neaime, S. (2016). Financial crises and contagion vulnerability of MENA stock markets. Emerging Markets Review, 27, 14-35. https://doi.org/10.1016/j.ememar.2016.03.002
  • Oloko, T. F. (2018). Portfolio diversification between developed and developing stock markets: The case of US and UK investors in Nigeria. Research in International Business and Finance, 45, 219-232. https://doi.org/10.1016/j.ribaf.2017.07.153
  • Piljak, V. (2013). Bond markets co-movement dynamics and macroeconomic factors: Evidence from emerging and frontier markets. Emerging Markets Review, 17, 29-43. https://doi.org/10.1016/j.ememar.2013.08.001
  • Rehman, M. U., & Shah, S. Z. A. (2016). Determinants of Return’s Co-Movement for Effective Portfolio Diversification Among Regional Stock Markets. Revista Evidenciação Contábil & Finanças, 4(1), 84-96. https://doi.org/10.18405/recfin20160106
  • Saiti, B., Bacha, O. I., & Masih, M. (2014). The diversification benefits from Islamic investment during the financial turmoil: The case for the US-based equity investors. Borsa Istanbul Review, 14(4), 196-211. https://doi.org/10.1016/j.bir.2014.08.002
  • Tudor, C., & Popescu-Dutaa, C. (2012). On the causal relationship between stock returns and exchange rates changes for 13 developed and emerging markets. Procedia-Social and Behavioral Sciences, 57, 275-282. https://doi.org/10.1016/j.sbspro.2012.09.1186
  • Zaimović, A., & Arnaut Berilo, A. (2014). Risk diversification between stock markets in Germany and Bosnia and Herzegovina. South East European Journal of Economics and Business, 9(1), 30-36. https://doi.org/10.2478/jeb-2014-0003

POTENTIAL FOR THE PORTFOLIO DIVERSIFICATION IN EMERGING MARKETS: A SURVEY OF EMPIRICAL EVIDENCE

Year 2021, Volume: 25 Issue: 1, 19 - 45, 30.06.2021
https://doi.org/10.51945/cuiibfd.862019

Abstract

Finding diversification opportunities in emerging markets presents continuous challenge for international investors. This is the case because diversification opportunities in emerging markets change as a result of change in the expected level, dynamics and direction of cross-country, cross-area and cross-assets correlations, as well as the expected (dis)appearance of volatility transmission across countries and areas. In order to provide the most up-to-date evidence on potential for the portfolio diversification in emerging markets, the author will use recent literature. According to the author’s findings, potential for portfolio diversification still exists in all emerging markets areas and the majority of individual emerging markets around the world. Additionally, portfolio diversification in different segments of an emerging financial market can also be beneficial to international investors. Due to the variability of key preconditions for international portfolio diversification, investors should frequently adjust their portfolio positions.

References

  • Abbas, Q., Khan, S., & Shah, S. Z. A. (2013). Volatility transmission in regional Asian stock markets. Emerging Markets Review, 16, 66-77. https://doi.org/10.1016/j.ememar.2013.04.004
  • Abbes, M. B., & Trichilli, Y. (2015). Islamic stock markets and potential diversification benefits. Borsa Istanbul Review, 15(2), 93-105. https://doi.org/10.1016/j.bir.2015.03.001
  • Al Nasser, O. M., & Hajilee, M. (2016). Integration of emerging stock markets with global stock markets. Research in International Business and Finance, 36, 1-12. https://doi.org/10.1016/j.ribaf.2015.09.025
  • Aluko, O. A., Fapetu, O., & Azeez, B. A. (2018). International portfolio diversification in the Nigerian stock market: A global financial crisis perspective. Future Business Journal, 4(2), 189-194. https://doi.org/10.1016/j.fbj.2018.06.001
  • Arouri, M. E. H., Nguyen, D. K., & Pukthuanthong, K. (2012). An international CAPM for partially integrated markets: Theory and empirical evidence. Journal of Banking & Finance, 36(9), 2473-2493. https://doi.org/10.1016/j.jbankfin.2012.05.004
  • Basu, A. K., & Huang-Jones, J. (2015). The performance of diversified emerging market equity funds. Journal of International Financial Markets, Institutions and Money, 35, 116-131. https://doi.org/10.1016/j.intfin.2015.01.002
  • Bekaert, G., & Harvey, C. R. (2017). Emerging equity markets in a globalizing world. Netspar Discussion Papers, DP 05/2014-024. Available at SSRN: https://ssrn.com/abstract=2344817 or http://dx.doi.org/10.2139/ssrn.2344817
  • Bekiros, S., Boubaker, S., Nguyen, D. K., & Uddin, G. S. (2017). Black swan events and safe havens: The role of gold in globally integrated emerging markets. Journal of International Money and Finance, 73, 317-334. https://doi.org/10.1016/j.jimonfin.2017.02.010
  • Bhuiyan, R. A., Rahman, M. P., Saiti, B., & Ghani, G. B. M. (2019). Does the Malaysian Sovereign sukuk market offer portfolio diversification opportunities for global fixed-income investors? Evidence from wavelet coherence and multivariate-GARCH analyses. The North American Journal of Economics and Finance, 47, 675-687. https://doi.org/10.1016/j.najef.2018.07.008
  • Briere, M., Oosterlinck, K., & Szafarz, A. (2015). Virtual currency, tangible return: Portfolio diversification with bitcoin. Journal of Asset Management, 16(6), 365-373. https://doi.org/10.1057/jam.2015.5
  • Carrick, J. (2016). Bitcoin as a complement to emerging market currencies. Emerging Markets Finance and Trade, 52(10), 2321-2334. https://doi.org/10.1080/1540496X.2016.1193002
  • Christoffersen, P., Errunza, V., Jacobs, K., & Jin, X. (2014). Correlation dynamics and international diversification benefits. International Journal of Forecasting, 30(3), 807-824. https://doi.org/10.1016/j.ijforecast.2014.01.001
  • Christoffersen, P., Errunza, V., Jacobs, K., & Langlois, H. (2012). Is the potential for international diversification disappearing? A dynamic copula approach. The Review of Financial Studies, 25(12), 3711-3751. https://doi.org/10.1093/rfs/hhs104
  • Das, D., Kannadhasan, M., & Bhattacharyya, M. (2019). Do the emerging stock markets react to international economic policy uncertainty, geopolitical risk and financial stress alike?. The North American Journal of Economics and Finance, 48, 1-19. https://doi.org/10.1016/j.najef.2019.01.008
  • Donadelli, M., & Persha, L. (2014). Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty. Research in International Business and Finance, 30, 284-309. https://doi.org/10.1016/j.ribaf.2013.09.008
  • Eisl, A., Gasser, S., & Weinmayer, K. (2015). Caveat emptor: Does Bitcoin improve portfolio diversification?. Available at SSRN: https://ssrn.com/abstract=2408997 or http://dx.doi.org/10.2139/ssrn.2408997
  • Gad, S., & Andrikopoulos, P. (2019). Diversification benefits of Shari'ah compliant equity ETFs in emerging markets. Pacific-Basin Finance Journal, 53, 133-144. https://doi.org/10.1016/j.pacfin.2018.10.009
  • Graham, M., Kiviaho, J., & Nikkinen, J. (2012). Integration of 22 emerging stock markets: A three-dimensional analysis. Global Finance Journal, 23(1), 34-47. https://doi.org/10.1016/j.gfj.2012.01.003
  • Guesmi, K., Saadi, S., Abid, I., & Ftiti, Z. (2019). Portfolio diversification with virtual currency: Evidence from bitcoin. International Review of Financial Analysis, 63, 431-437. https://doi.org/10.1016/j.irfa.2018.03.004
  • Guidi, F., & Ugur, M. (2014). An analysis of South-Eastern European stock markets: Evidence on cointegration and portfolio diversification benefits. Journal of International Financial Markets, Institutions and Money, 30, 119-136. https://doi.org/10.1016/j.intfin.2014.01.007
  • Gupta, R., & Guidi, F. (2012). Cointegration relationship and time varying co-movements among Indian and Asian developed stock markets. International Review of Financial Analysis, 21, 10-22. https://doi.org/10.1016/j.irfa.2011.09.001
  • Hadhri, S., & Ftiti, Z. (2019). Asset allocation and investment opportunities in emerging stock markets: Evidence from return asymmetry-based analysis. Journal of International Money and Finance, 93, 187-200. https://doi.org/10.1016/j.jimonfin.2019.01.002
  • Kellner, R., & Rösch, D. (2019). A country specific point of view on international diversification. Journal of International Money and Finance, 98, 102064-102076. https://doi.org/10.1016/j.jimonfin.2019.102064
  • Koepke, R. (2019). What drives capital flows to emerging markets? A survey of the empirical literature. Journal of Economic Surveys, 33(2), 516-540. https://doi.org/10.1111/joes.12273
  • Majdoub, J., & Mansour, W. (2014). Islamic equity market integration and volatility spillover between emerging and US stock markets. The North American Journal of Economics and Finance, 29, 452-470. https://doi.org/10.1016/j.najef.2014.06.011
  • Mensah, J. O., & Alagidede, P. (2017). How are Africa's emerging stock markets related to advanced markets? Evidence from copulas. Economic Modelling, 60, 1-10. https://doi.org/10.1016/j.econmod.2016.08.022
  • Mensi, W., Hammoudeh, S., & Kang, S. H. (2017). Risk spillovers and portfolio management between developed and BRICS stock markets. The North American Journal of Economics and Finance, 41, 133-155. https://doi.org/10.1016/j.najef.2017.03.006
  • Mensi, W., Hammoudeh, S., Reboredo, J. C., & Nguyen, D. K. (2014). Do global factors impact BRICS stock markets? A quantile regression approach. Emerging Markets Review, 19, 1-17. https://doi.org/10.1016/j.ememar.2014.04.002
  • Mensi, W., Shahzad, S. J. H., Hammoudeh, Zeitun, S. R., & Rehma, M. U. (2017). Diversification potential of Asian frontier, BRIC emerging and major developed stock markets: A wavelet-based value at risk approach. Emerging Markets Review, 32, 130-147. https://doi.org/10.1016/j.ememar.2017.06.002
  • Miyajima, K., Mohanty, M. S., & Chan, T. (2015). Emerging market local currency bonds: diversification and stability. Emerging Markets Review, 22, 126-139. https://doi.org/10.1016/j.ememar.2014.09.006
  • Najeeb, S. F., Bacha, O., & Masih, M. (2015). Does heterogeneity in investment horizons affect portfolio diversification? Some insights using M-GARCH-DCC and wavelet correlation analysis. Emerging Markets Finance and Trade, 51(1), 188-208. https://doi.org/10.1080/1540496X.2015.1011531
  • Narayana, S., & Rehman, M. U. (2017). Diversification opportunities between emerging and frontier Asian (EFA) and developed stock markets. Finance Research Letters, 23, 223-232. https://doi.org/10.1016/j.frl.2017.06.007
  • Neaime, S. (2016). Financial crises and contagion vulnerability of MENA stock markets. Emerging Markets Review, 27, 14-35. https://doi.org/10.1016/j.ememar.2016.03.002
  • Oloko, T. F. (2018). Portfolio diversification between developed and developing stock markets: The case of US and UK investors in Nigeria. Research in International Business and Finance, 45, 219-232. https://doi.org/10.1016/j.ribaf.2017.07.153
  • Piljak, V. (2013). Bond markets co-movement dynamics and macroeconomic factors: Evidence from emerging and frontier markets. Emerging Markets Review, 17, 29-43. https://doi.org/10.1016/j.ememar.2013.08.001
  • Rehman, M. U., & Shah, S. Z. A. (2016). Determinants of Return’s Co-Movement for Effective Portfolio Diversification Among Regional Stock Markets. Revista Evidenciação Contábil & Finanças, 4(1), 84-96. https://doi.org/10.18405/recfin20160106
  • Saiti, B., Bacha, O. I., & Masih, M. (2014). The diversification benefits from Islamic investment during the financial turmoil: The case for the US-based equity investors. Borsa Istanbul Review, 14(4), 196-211. https://doi.org/10.1016/j.bir.2014.08.002
  • Tudor, C., & Popescu-Dutaa, C. (2012). On the causal relationship between stock returns and exchange rates changes for 13 developed and emerging markets. Procedia-Social and Behavioral Sciences, 57, 275-282. https://doi.org/10.1016/j.sbspro.2012.09.1186
  • Zaimović, A., & Arnaut Berilo, A. (2014). Risk diversification between stock markets in Germany and Bosnia and Herzegovina. South East European Journal of Economics and Business, 9(1), 30-36. https://doi.org/10.2478/jeb-2014-0003
There are 39 citations in total.

Details

Primary Language English
Journal Section Research Articles
Authors

Nermina Pobrić 0000-0003-3651-3783

Publication Date June 30, 2021
Submission Date January 15, 2021
Acceptance Date May 1, 2021
Published in Issue Year 2021 Volume: 25 Issue: 1

Cite

APA Pobrić, N. (2021). POTENTIAL FOR THE PORTFOLIO DIVERSIFICATION IN EMERGING MARKETS: A SURVEY OF EMPIRICAL EVIDENCE. Çukurova Üniversitesi İktisadi Ve İdari Bilimler Fakültesi Dergisi, 25(1), 19-45. https://doi.org/10.51945/cuiibfd.862019