Risk-based portfolio strategy in emerging stock markets: economic significance from Brazil, Russia, India and China

Aman Ullah and Xiangdong Long

Macroeconomics and Finance in Emerging Market Economies, 2008, vol. 1, issue 1, 31-49

Abstract: The purpose of this paper is to examine the conditional volatility and correlation predictability of four emerging stock markets, and address the issue whether investors could exploit this predictability to earn excess returns from the minimum variance portfolio of index component stocks. Inevitably, transaction cost affects the conclusive results. Nevertheless, economic gain exceeding a conservatively high transaction cost could be derived from a number of conditional volatility and correlation models. One dominant model, the shrinkage model, outperforms the market across the countries, cost structures and performance measures. We also document the superiority of averaging methodologies. However, semiparametric modelling falls in a grey area of profitability - sometimes attractive whilst sometimes not attractive.

Keywords: correlation; emerging stock market; performance measure; portfolio; volatility (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1080/17520840701835781

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