The nature and determinants of comovement between developed, emerging and frontier equity markets: Europe versus Asia‐Pacific

Abstract

International investors are increasingly attracted towards emerging and frontier markets because of their potential to enhance diversification benefits of a global portfolio. This calls for a rigorous analysis of the nature and determinants of stock market comovement between developed, emerging, and frontier markets in Europe and Asia-Pacific regions. The findings suggest that unlike their Asia-Pacific counterparts, European developed, emerging, and frontier stock markets display a higher degree of comovement. Although Asia-Pacific frontier markets provide good diversification opportunities, investors must be cautioned against their weak financial system. The volatility of returns, gross domestic product growth rate, and the 2008 global financial crisis (GFC) are the key determinants of stock market comovement in Europe. The mechanisms by which comovement in the Asia-Pacific region is strengthened differ across markets. Comparative analysis of comovement and its determinants across different classes of equity markets and geographies is expected to provide valuable perspectives to global investors, portfolio managers, and policymakers.

The role of the macroeconomic environment in shaping capital market co-movement in C.E.E. countries

“…However, if the degree of contagion or co-movement between two financial markets is strong, the beneficial effects of international portfolio diversification is reduced when an external shock is transmitted uniformly to another interdependent capital markets (Rua & Nunes, 2009;Syllignakis & Kouretas, 2011). Therefore, identifying internal factors that could reduce the effect of external shock could increase the efficiency of international portfolio diversification (Ajayi, Mehdian, & Stoica, 2018;Thomas, Kashiramka, & Yadav, 2019). Bekaert, Ehrmann, Fratzscher and Mehl (2014) analysed the contagion phenomenon during the recent financial crisis 2008-2009 and finds that the main vectors that determine the magnitude of the contagion phenomenon is related to economic fundamentals, reduced country ratings, budget and/or current account deficits rather than the country of origin.…”

International price earnings and country risk model in an Asian context

“…Additionally, it examines fundamental factors of PEs, differences across countries, and subsequent impairments to arbitrage in the equity markets using a sample of six developed countries between 2007 and 2017. As these markets are developed, they are presumably integrated and politically stable (Thomas et al , 2019). Therefore, comparisons of foreign stock valuations can identify important factors that may adversely affect the equity market.…”