Do frontier equity markets exhibit common trends and still provide diversification opportunities?

Author: Miles, William

Source: International Economic Journal, Volume 19, Number 3, September 2005 , pp. 473-482(10)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

Many small, frontier equity markets in regions such as Africa and Eastern Europe have opened in recent years. As in other larger emerging markets, important issues for investors are the extent of financial integration with exchanges in other countries and, if some reasonable degree of integration is found, whether such markets still provide diversification opportunities. Here, we will examine a frequently used metric of integration by testing for the existence of common trends, or cointegration, in these frontier markets. While common stochastic trends are found, results show that coefficients on cointegrating vectors are at times negative, and reaction to deviations from the long-run trend are often slow, thus indicating that frontier markets are a good source of diversification opportunities despite a degree of integration.

Keywords: Portfolio choice; international financial markets

Document Type: Research article

DOI: http://dx.doi.org/10.1080/10168730500199475

Affiliations: 1: Department of Economics, Wichita State University, Kansas, USA

Publication date: 2005-09-01