Market Integration and Portfolio Diversification Benefits: A Study of Selected Developed, Emerging, and Frontier Markets

Abstract

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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. Short-term 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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