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A three tiered nested analytical approach to financial integration: the case of emerging and frontier equity markets

A three tiered nested analytical approach to financial integration: the case of emerging and frontier equity markets

Cagliesi, Gabriella and Guidi, Francesco (2019) A three tiered nested analytical approach to financial integration: the case of emerging and frontier equity markets. [Working Paper] (Submitted)

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Abstract

In this study we investigate the patterns of integration of emerging and frontier equity markets with the US stock market during the period 2002 2014 characterised by financial turmoil and instability. To add rigour to the study, to overcome the limitations of simple correlation analysis of integration, and to produce more robust results, we propose a nested approach based on three tiered analysis design. The first level makes use of the smooth transition conditional correlations amongst US, emerging and frontier markets. The second tier uses the results of the smooth transition approach to create different international portfolios, that, based on alternative management strategies, account for the time varying correlations amongst markets and exploit the scope of international diversification with less integrated markets. Finally, the last tier of analysis uses returns and risks of these different international portfolios and applies structural models to explore characteristics and patterns of integration in turbulent times. The three nested approach indicates that the recent global financial crisis has produced a permanent increase of the degree of integration among the US and the frontier markets. Conversely, the effect of the crisis seems to have been only temporary in the case of integration among the US and the emerging equity markets. Despite the changes brought by the crisis, the degree of integration among emerging markets and the US market is considerably larger than the degree of integration among frontier and US markets. The novelty of this methodological approach enables us to provide some original contributions and empirical results that are robust and relevant to investors in international markets.

Item Type: Working Paper
Uncontrolled Keywords: Markov Switching Regimes ARCH models, Smooth transition conditional correlation, optimal portfolio, diversification benefits, news approach
Subjects: H Social Sciences > HB Economic Theory
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of International Business & Economics
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA)
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA) > Centre for Governance, Risk & Accountability (CGRA)
Last Modified: 26 Jul 2019 10:12
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: GREAT 2
URI: http://gala.gre.ac.uk/id/eprint/24276

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