Emerging Equity Markets Connectedness, Portfolio Hedging Strategies and Effectiveness

Nizar Harrathi, Chaker Aloui, Mohamed Ali Houfi, Jihed Majdoub


In this paper, we investigate the volatility spillovers between equity market indexes for Islamic and non-Islamic emerging countries. To do so, we implement a combination of a vector autoregressive (VAR) and a multivariate GARCH models under BEKK specification (VAR-BEKK-MGARCH) models with constant conditional correlation (CCC) and dynamic conditional correlations (DCC) for daily equity returns of six markets, namely Turkey, Indonesia, Egypt, Mexico, China and Brazil. Our findings disclose strong volatility spillovers among the Islamic and the non-Islamic country’ market returns. The volatility spillovers are time varying and are affected by the occurrence of recent financial crises. Furthermore, we extent the volatility spillovers analysis by providing some financial implications in terms of optimal portfolio’ allocations and hedging effectiveness. Specifically, we estimate the optimal weights for a minimum risk multi-country portfolios, we compute the hedge ratio and we assess the hedging strategies’ effectiveness. Our findings provide prominent implications for policy makers and portfolio managers in terms of the stability of the financial systems, asset allocation decisions and designing portfolio hedging strategies.

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DOI: https://doi.org/10.5430/ijfr.v7n2p189

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International Journal of Financial Research
ISSN 1923-4023(Print)ISSN 1923-4031(Online)


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