Risk Diversification in Asean-5 Financial Markets: An Empirical Analysis in the Context of the Global Pandemic (Covid-19)

Abstract

The World Health Organization (WHO) has designated the new coronavirus infection as a global pandemic, based on the risk of contagion, and the number of confirmed cases in more than 195 countries. COVID-19 has an intense impact on the global economy, resulting from uncertainty and pessimism, with adverse effects on financial markets. Due to these events, this essay aims to estimate if the portfolio’s diversification is feasible in the financial markets of Indonesia, Malaysia, Philippines, Singapore, and Thailand (ASEAN-5), in the context of the global pandemic (Covid-19), regarding the period of July 1, 2019, to July 22, 2020. To achieve such an analysis, is intended to provide answers for two questions, namely: i) the global pandemic (Covid-19) has accentuated financial integration between the ASEAN-5 markets? ii) If so, can the persistence of returns affect the risk diversification of portfolios? The results obtained suggest that those regional markets present accentuated levels of integration. However, the Singapore's stock market index does not show any level of integration, indicating that the implementation of portfolio’s diversification strategies can be considered; however, the same can no longer be evident for the other ASEAN-5 markets. Additionally, we verified that the ASEAN-5 markets indicate persistence in returns, that is, the presence of accentuated long memories, except for the Singapore market (SGX). These findings show that prices do not fully reflect the information available and that changes in prices are not independent and identically distributed. This situation is found for investors, since some returns can be expected, creating opportunities for arbitrage and abnormal earnings. Corroborating the trendless cross-correlation coefficients (𝜆𝐷𝐶𝐶𝐴), proven evidence coefficients, mostly, suggest the existence of risk transmission between markets. In conclusion, the authors seek that the implementation of an efficient diversification strategy for portfolios requires agreement with the controversial application. These conclusions also open space for the regulators of these regional markets to take measures to ensure better information between these markets and international markets.

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“…These findings might point to the existence of autocorrelation or heteroscedasticity in the digital currencies under consideration, resulting in some predictability and the prospect of above-average market profits. These findings are supported by the authors Dias, Heliodoro, et al (2019), Dias, da Silva, et al (2019), Dias, Heliodoro, Teixeira, et al (2020, Silva et al (2020), Dias and Santos (2020a), , who highlight the existence of strong probabilities of above-average gains by investors when using adjusted trading strategies.…”

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“…Considering the above, and accordingly to the authors Silva et al (2020), Zebende et al (2022) understanding the degree of linkages and correlations of the assets markets, as well as evaluating the co-movements degree can help the investors to diversify their asset portfolio and consequently reduce their risk exposure, as well as leverage their earnings, since the diagnosis of the degree of the integration will allow the identification of whether the assets have similar returns, if they are assets belonging to integrated markets, or if, due to their exposure to different sources of risk, they have differentiated returns and, therefore, constitute assets that are part of the segmented market. This article will analyze the co-movements between the G7 stock market, such as DJ index, S&P500 (representing the USA stock market), FTSE 100 (United Kingdom), S&P/TSX (Canada), DAX 30 (Germany), CAC 40 (France), Nikkei 225 (Japan), Italy Ds market (Italy) and the cryptocurrencies Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH) and Crypto 10.…”

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“…Considering the above, and accordingly to the authors Silva et al (2020), Zebende et al (2022) understanding the degree of linkages and correlations of the assets markets, as well as evaluating the co-movements degree can help the investors to diversify their asset portfolio and consequently reduce their risk exposure, as well as leverage their earnings, since the diagnosis of the degree of the integration will allow the identification of whether the assets have similar returns, if they are assets belonging to integrated markets, or if, due to their exposure to different sources of risk, they have differentiated returns and, therefore, constitute assets that are part of the segmented market.…”