Abstract
The state of cross-market linkage structures and its stability over varying time-periods play a key role in the performance of international diversified portfolios. There has been an increasing interest of global investors in emerging capital markets in the Asian region. In this setting, an investigation into the temporal dynamics of cross-market linkage structures becomes significant for the selection and optimal allocation of securities in an internationally-diversified portfolio. In the quest for this, in the current study, weighted network models along with network metrics are employed to decipher the underlying cross-market linkage structures among Asian markets. The study analyses the daily return data of fourteen major Asian indices for a period of 14 years (2002–2016). The topological properties of the network are computed using centrality measures and measures of influence strength and are investigated over temporal scales. In particular, the overall influence strengths and India-specific influence strengths are computed and examined over a temporal scale. Threshold filtering is also performed to characterize the dynamics related to the linkage structure of these networks. The impacts of the 2008 financial crisis on the linkage structural patterns of these equity networks are also investigated. The key findings of this study include: a set of central and peripheral indices, the evolution of the linkage structures over the 2002–2016 period and the linkage dynamics during times of market stress. Mainly, the set of indices possessing influence over the Asian region in general and the Indian market in particular is also identified. The findings of this study can be utilized in effective systemic risk management and for the selection of an optimally-diversified portfolio, resilient to system-level shocks.
Highlights
In the field of international finance, the investigation into the integration patterns of the capital market has gained prominence because of its associated significance in financial decision making in the areas of portfolio diversification and asset allocation
The topological measures computed in this study are centrality measures and influence strength measures
Because these centrality measures are indicative of the position of the Asian indices, their computations and further elucidation in light of cross-market linkages are important in terms of information transmission in the network
Summary
In the field of international finance, the investigation into the integration patterns of the capital market has gained prominence because of its associated significance in financial decision making in the areas of portfolio diversification and asset allocation. The information regarding the state of cross-market linkage structures, especially during different market conditions, is an important factor to be considered in deciding the selection of securities and their optimum allocation to the portfolio. This is more significant in cases where the portfolio has been designed based on the historical correlational structure of markets, and such structures do not stay robust during times of market stress; the whole exercise of diversification becomes futile. In this context, studying the evolutionary trends of cross-market linkage structures and their behaviour during periods of market crisis is an interesting case for investigation
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