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Market Integration And Portfolio Diversification Benefits: A Study Of Selected Developed, Emerging, And Frontier Markets


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1 Assistant Professor, Economics and Finance, Institute of Management, Nirma University, S.G. Highway, Ahmedabad, Gujarat, India
     

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The objective of the study is to examine the integration and portfolio diversification opportunities for developed, emerging, and frontier markets. The lack of long-term integration among the markets reveals the existence of portfolio diversification opportunities. Shortterm integration was measured by correlation and Granger causality test, whereas long-term integration was examined by the cointegration test. The results of diversification benefits reveal that investors from Canada, France, and Switzerland experience higher returns, lower risks, and a better Sharpe ratio with the diversification of the portfolio. The US investors do not gain much from diversification, as the home market offers better returns. The maximum Sharpe ratio offers the highest Sharpe to the investors, whereas the minimum variance portfolio offers the lowest risk. The study has implications for investors in terms of investment allocation to respective markets for wealth gain in their portfolio. The investors can design their investment portfolio either to keep the risk to the lowest level or achieve a higher Sharpe ratio.

Keywords

Market Integration, Portfolio Diversification, Developed Markets, Emerging Markets, Frontier Markets
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  • Market Integration And Portfolio Diversification Benefits: A Study Of Selected Developed, Emerging, And Frontier Markets

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Authors

Ritesh Patel
Assistant Professor, Economics and Finance, Institute of Management, Nirma University, S.G. Highway, Ahmedabad, Gujarat, India

Abstract


The objective of the study is to examine the integration and portfolio diversification opportunities for developed, emerging, and frontier markets. The lack of long-term integration among the markets reveals the existence of portfolio diversification opportunities. Shortterm integration was measured by correlation and Granger causality test, whereas long-term integration was examined by the cointegration test. The results of diversification benefits reveal that investors from Canada, France, and Switzerland experience higher returns, lower risks, and a better Sharpe ratio with the diversification of the portfolio. The US investors do not gain much from diversification, as the home market offers better returns. The maximum Sharpe ratio offers the highest Sharpe to the investors, whereas the minimum variance portfolio offers the lowest risk. The study has implications for investors in terms of investment allocation to respective markets for wealth gain in their portfolio. The investors can design their investment portfolio either to keep the risk to the lowest level or achieve a higher Sharpe ratio.

Keywords


Market Integration, Portfolio Diversification, Developed Markets, Emerging Markets, Frontier Markets

References