Can advanced markets help diversify risks in frontier stock markets? Evidence from Gulf Arab stock markets

Riza Demirer

Research in International Business and Finance, 2013, vol. 29, issue C, 77-98

Abstract: This study examines global diversification benefits from the perspective of local investors in the frontier markets in the Gulf Cooperation Council using two diversification measures: the correlation index and return dispersion. The findings suggest a strong link between market volatility and both diversification measures in all markets, with the exception of Bahrain, indicating that investors in these frontier markets will face significant challenges achieving desired levels of diversification using domestic stocks only. However, I also find that significant amount of market risk in these countries can be eliminated by supplementing domestic portfolios with positions in advanced markets. Finally, I show that risk minimization strategies using foreign traded assets also lead to favorable risk adjusted returns for investors in these markets, stressing the potential benefits of financial liberalization in developing markets.

Keywords: Portfolio diversification; Downside risk; Return dispersion; Correlation index; GCC stock markets (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:29:y:2013:i:c:p:77-98

DOI: 10.1016/j.ribaf.2013.04.001

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