Diversification Opportunities Research Articles

Causal links between hot money and investment markets: evidence from small-scale economy

Hot money is generally associated with economic and financial turmoil in emerging economies. In this backdrop, a number of studies document the causal links between hot money and financial markets. Accordingly, the study examines the causal relationship among hot money, equities, and real estate assets in the small-scale economy of Pakistan. For this purpose, we employ various time series techniques such as the JJ Co-integration test, Granger causality tests, Impulse Response Functions (IRF), and Variance Decomposition Analysis (VDC). The findings validate the long-term association between speculative funds and underlying investment markets. The results uncover unidirectional causality from investment markets to hot money in Pakistan. However, the lack of a bi-directional relationship among the underlying variables indicates that hot money is not a major driver of soaring prices in equities and real estate assets. Alternatively, developing the underlying markets attracts speculative cash inflows into the economy. The findings of the study highlight some useful implications for investors and regulators. For instance, the study's findings present valuable insights for international investors seeking diversification opportunities in small-scale economies such as Pakistan. Also, the regulators in the underlying economy can utilize the study findings to formulate an optimal model to manage international capital flows.

Global pandemic crisis and risk contagion in GCC stock markets

This study investigates how the COVID-19 outbreak has shaped the volatility spillover between oil and Gulf Cooperation Council (GCC) stock markets. Contagion analysis is conducted by implementing a vector error correction (VECM) asymmetric BEKK model, wherein both cointegration and asymmetric features are considered. Financial market uncertainty caused by the recent health crisis is captured using Baker et al.’s (2020) newly developed infectious disease tracker. Our results indicate a significant discrepancy in the GCC group, as shock and volatility linkages between oil and equities are more apparent for some countries but not for others. The estimated VECM-asymmetric BEKK model reveals cross-market asymmetric spillover effects only in Kuwait, Qatar, and Saudi Arabia. We report that the global pandemic has strongly affected crude oil market volatility, while the GCC region seems to be less affected by the emergence of the new infectious disease. Our findings underscore the diversification opportunities offered by Gulf equity markets to international investors.

Do Rare Earths and Energy Commodities Drive Volatility Transmission in Sustainable Financial Markets? Evidence from China, Australia, and the US

The high volatility and energy usage of rare earths have raised sustainable and financial concerns for environmentalists and sustainable investors. Therefore, this paper aims to investigate time-varying volatility transmission among rare earths elements, energy commodities, and sustainable financial markets. The sample covers global and major financial markets, i.e., US, China, and Australia. Using daily log returns from 2018 to 2022, the paper considers the dynamic Time Varying Parameter-Vector Autoregression (TVP-VAR) connectedness approach to gauge the time-varying features of volatility spillovers. The findings of total spillovers index reveal weak connectedness among markets during the sampled period. US and China rare earth markets were net volatility transmitters, whereas the Dow Jones Australia Sustainability Index (ASI), China Sustainability Index (CSI), Dow Jones Sustainability World Index (SWI), and MVIS Global Rare Earth Index (MVISGREI) were net recipients. Moreover, energy commodities i.e., WTI Crude Oil, Gasoline, and Natural Gas were net volatility transmitters, while ASI, CSI, and SWI were major volatility recipients. The weak financial contagion effect and connectedness across financial markets uncovers possible diversification opportunities. However, the US sustainable financial market is persistently not affected by these volatility spillovers. Policymakers need to establish strict regulations to protect sustainable financial markets in China and Australia.

Do green bonds offer a diversification opportunity during COVID-19?—an empirical evidence from energy, crypto, and carbon markets

The present study is a novel attempt to unravel the connectedness of the green bond with energy, crypto, and carbon markets using the S&P green bond index (RSPGB). We consider MAC global solar energy index (RMGS) and ISE global wind energy index (RIGW) as proxies of the energy market and use bitcoin and the European energy exchange carbon index (REEX) for the cryptocurrency and carbon market. Employing the Diebold and Yilmaz (2012), Baruník and Krehlík (2018), and wavelet coherence econometric techniques, we find that the energy market (RMGS) has the highest connectedness derived from other asset classes, and bitcoin (RBTC) has the least connectedness. Concurrently, we find that the risk transmission is heterogeneous in different scales as the short period has less connectedness than the medium and long run. We conclude that the overall diversification opportunity among green bonds, energy stock, bitcoin, and the carbon market is more in the short-run than in the medium and long-run. In summary, our findings on the green bond market will provide investors, portfolio managers, and policymakers with critical insight into ensuring a sustainable financial market.

Uncertainty and US stock market dynamics

This study investigates the long-term and dynamic relationship between US sector stock returns and risk factors, focusing on uncertainty. Uncertainty risk factors include volatility indices associated with the equity (VIX), fixed-income (TYVIX), oil (OVX), and foreign exchange (EUVIX) markets. The cointegration analysis shows that VIX, TYVIX, OVX, and EUVIX are collectively driving forces of US sector indices in the long run. The causality testing results reveal that uncertainty about long-term interest rates, as proxied by TYVIX, exerts a significant effect on US stock market performance across sectors. Interestingly, in determining the variability of sector stock returns, we find that shocks to the uncertainty of crude oil prices and the exchange rate play a more important role than shocks to their levels. Risk diversification opportunities are identified.

Ṣukūk or Bond, Which Is More Sustainable during COVID-19? Global Evidence from the Wavelet Coherence Model

Understanding the co-movement and lag–lead relations among indices is integral to financial decision making. These parameters show the reactiveness of the market towards new information. Understanding them helps to minimize risk and facilitates optimal portfolio diversification. By employing the wavelet coherence econometric model, the authors of this study analyzed the intricate relations among the Bond and Ṣukūk indices using global data belonging to the United States (US), the United Kingdom (UK), Middle East and North Africa (MENA), and Gulf Cooperation Council (GCC) countries. The findings indicated the presence of strong but similar implications of the initial shock of COVID-19 deaths on both Islamic and conventional markets’ volatilities, especially in long-term investment bands (64–128 days). The results oppose the general belief that Islamic finance is more sustainable and less volatile to crises than its traditional counterparts. Moreover, the authors of this study report diverse relationships among bond and Ṣukūk indices throughout the sample periods. We consistently found low correlations in short-term investment bands (4–16), leading to optimal diversification opportunities. However, high correlations were reported due to COVID-19 in the long-term investment bands (128–256), leading to low diversification opportunities for long-term investors.

Time-frequency spillovers and connectedness between precious metals, oil futures and financial markets: Hedge and safe haven implications

This paper examines the time-frequency spillovers and connectedness between the major precious metals futures markets (gold, palladium, platinum, and silver), the West Texas Intermediate (WTI) oil futures, the US stock market, the US 10-year Treasury Bond (T-Bond) market, and the US dollar index. Applying Barunik and Krehlik’s (2018) novel framework, the results show that spillovers across markets strengthens in the short-term, suggesting that diversification opportunities are lower in the short-term than the long-term. Furthermore, we find that the net transmitter/receiver of spillover is dependent on the frequency being analyzed, thereby indicating asymmetric spillovers among markets. Moreover, gold and silver (platinum, T-Bonds, and US dollar index) are net transmitters (receivers) of spillover regardless of the time horizon. Palladium is the net transmitter of spillover to the other markets in the short-term period (1–8 days); in contrast, in the long-term period (8–256 days), the S&P 500 index is the net transmitter of spillover. Precious metals futures, crude oil, and T-Bond assets are diversifiers for the US stock market for short-term and the long-term investments. The US dollar index is a strong hedge regardless of the time horizon and a strong (weak) safe haven asset in the short (long) term. Precious metals are a safe haven in the short-term and long-term periods. Crude oil and T-Bonds are not a safe haven for US equity investors. Finally, our result support evidence of diversification benefits and better hedging effectiveness by adding precious metals, WTI, T-Bond, and USDX to S&P500 index, which is higher in the long-term than in the short-term. WTI offers the highest hedging effectiveness, regardless the time investment horizons.

Analyzing diversification benefits of cryptocurrencies through backfill simulation

The cryptocurrency market provides an interesting diversification opportunity for asset allocation due to its fundamental differences compared to traditional asset classes. Even though the cryptocurrency market experienced a surge until 2017, the market has relatively stabilized since the bubble along with increased participation from institutional investors. Instead of only performing analysis for the recent years, which is short for testing asset allocation benefits, we focus on the post-bubble market condition but backfill cryptocurrency returns into the past in order to analyze a longer investment horizon. In our backfill simulation, investment in cryptocurrencies show higher return but mixed results in terms of portfolio efficiency for risk-based optimized portfolios. Even though risk-based models allocate a small portion in cryptocurrencies, its high volatility limits diversification benefits since even small allocations often lead to higher portfolio risk.

Risk Connectedness Between Green and Conventional Assets with Portfolio Implications.

The increasing concerns of investors toward green bonds and their appealing nature of diversification has motivated the current research to study the risk connectedness between green and conventional assets spanning from August 2014 to December 2020. We first estimate the dynamic equi-correlations through DECO-GARCH. Next, we assess the dynamic and static risk connectedness in the median, extreme low, and extreme high quantiles arguing that spillovers vary across different time periods particularly during economically intense time periods. Finally, we analyzed the hedge ratio and hedge effectiveness between green bonds and other assets. We find that equi-correlations are intense during economic shocks such as the Shale oil crisis, Brexit, US interest rate hike, and COVID-19 pandemic. The volatility analysis at average, lower, and upper quantiles also validate time-varying attributes of green and conventional assets. Further, network figures of green and conventional assets identify potential diversification opportunities. Meanwhile, the hedge effectiveness indicates that green bonds are effective hedge for precious metals and cryptocurrencies. Our findings draw multiple implications for policymakers, green investors, financial market participants, and regulatory authorities regarding flight-to-safety during crisis times and maintaining a diverse portfolio to escape potential losses.

The mandarese gastronomy: Preference and opportunities for food diversification on the dining table of young generations

The circulation of global food, especially fast food like sausages, nuggets, fried chicken such as KFC, and other instant food, has been circulating into rural areas. Many estimated younger generation's preferences would change under these conditions. Because of that, we were conducted research in the Tinambung, Polewali Mandar District, West Sulawesi Province, from May to August 2021 to understand the young preferences for food. The research found that the Millennial, Z, and Alpha generations of Mandarese still have a good preference for their local gastronomy. The types of the Mandarese food on this study are Baupiapi, Jepa, Bubur Tarreang, Loka Anjoroi, and Binte. Those are made from local raw materials such as cassava, banana, coconut, fish, millet, and corn. These agricultural and local raw materials can be the basis for developing more diverse food for the daily consumption of the youth. The young generation's preferences are essential because their population is enormous. It means their food preference will affect the food system. It can also be a factor in determining a future food diversification policy and self-sufficiency of the Mandarese. Currently, the highest preference of the young generation in Polewali Mandar still tends to like and choose Mandar gastronomy compared with global foods. It shows that local foods are still in line with the youth's preferences but need to develop as an essential part of their daily consumption. Their preferences for local gastronomy are still facing challenges; it will be more diverse or even the other way around because of the hegemony of the global food trend.

Portfolio diversification of MENA markets with cryptocurrencies: Mean-variance vs higher-order moments approach

The emergence of disruptive cryptocurrency platforms and decentralized finance (DEFI) has revolutionized the financial landscape over the last couple of years. Against this backdrop, and in view of the limited opportunities for diversification in the conventional assets, it becomes evident for the investors to look for better opportunities by searching for rather non-conventional assets like cryptocurrencies as a means of portfolio diversification. This study analyses the major cryptocurrencies based on their market capitalization and the major markets from MENA regions to evaluate the potential of cryptocurrencies in portfolio diversification. The study employs the mean-variance approach and then compares the results with the higher-order moments. We found that cryptocurrencies offer considerable potential for diversification for the MENA markets, but these exposures must be conservatively given the explosive price evolution and extreme volatility of the cryptocurrencies. The results also suggest that cryptocurrencies do not considerably contribute to the portfolio diversification in the uncertain market movements and crises, such as that witnessed during Fed's regime shift, accentuated by the Ukraine crisis.

Multiresolutional statistical machine learning for testing interdependence of power markets: A Variational Mode Decomposition-based approach

In the increasingly interconnected and digitized world, the field of electricity price forecasting has benefited from growing research especially due to the market liberalization and the connectedness between electrical systems. This study defines a novel multiscaled forecasting model based upon the Variational Mode Decomposition (VMD) to quantify multiscaled cross-correlation between two important European markets during COVID-19 pandemic. The VMD is known to be a strong information processing tool which is localized in both frequency and time, and is especially used for capturing nonstationary and nonlinear behaviors of time series. The set of new VMD techniques is applied on hourly electricity spot prices from the Nord Pool and MIBEL energy exchanges for the period ranging from January 2019 to March 2020. The sampled time series include a period of specific recession in the financial system, coinciding with the Brexit and COVID-19 event, which was accompanied by a significant collapse in the world’s economic sphere. The empirical results reveal a significant dependence between electricity markets across long- and medium-run investment time horizons, with evidence for dynamic lead–lag relationships at some frequency sub-bands. However, over the short-term (daily and intra-daily intervals), we notice a kind of independence between markets, especially in times of crisis, which offers investors different investment diversification opportunities. On the other hand, the accuracy of generated forecasts prove the interest of a conjoint modeling and the reliability of this new tool, in particular when the approach is adequately coupled with feedforward neural networks.

Do scientific capabilities in specific domains matter for technological diversification in European regions?

Do scientific capabilities in regions translate into technological leadership? This is one of the most pressing questions in academic and policy circles. This paper analyzes the matching of scientific and technological capabilities of 285 European regions. We build on patent and publication records to identify regions that lie both at the scientific and technological frontiers (strongholds), that are pure scientific leaders, pure technological leaders, or just followers in 18 domains. Our regional diversification model shows that local scientific capabilities in a domain are a strong predictor of the development of new technologies in that domain in regions. This finding is particularly relevant for the Smart Specialization policy because it implies that the analysis of domain-specific scientific knowledge can be a powerful tool to identify new diversification opportunities in regions.

Integrated Spillover Effect of Cross-Listed Stock Markets on the Indian Equity Market

The increased integration due to cross-listing leads to the volatility spillover effect on the domestic market posing from the cross-listed global indices viz., Nifty 50 from India, Luxx 100 from Luxembourg, NASDAQ from the US, and FTSE_Aim 100 from the UK. Johansen Co-integration test is applied to check the level of integration, which is further checked by multivariate granger causality showing the causality pattern among the indices. GARCH (1,1) model is applied to examine the volatility spillover effect on the Indian Stock Market. The findings suggest that the series are co-integrated with one vector ‘v,’ which is confirmed by the Trace and Max-Eigen Test. The Multivariate Granger Causality test confirms the bivariate causal pattern between India and US markets, implying the dual effect. In contrast, the Luxembourg market is relatively exogenous, which gives investors an opportunity for portfolio diversification. ARCH term is significant in the GARCH (1,1) model showing that the past innovation in the time series leads to the present fluctuation in the Indian stock market. Also, the results show a significant spillover effect from the US and UK markets. Thus, this will assist the investors that by concentrating on the movement of these markets, they can take specific actions regarding portfolio management.

DYNAMIC LINKAGES AND INTEGRATION AMONG FIVE EMERGING BRICS MARKETS: PRE- AND POST-BRICS PERIOD ANALYSIS

This study aims to explore dynamic linkages and integration among emerging markets of BRICS, especially comparing the pre- and post-BRICS formation period behaviors and further comment upon the portfolio diversification opportunities available for global investors. Weekly closing indices of BRICS stock markets for the period 2000–2020 have been taken. Considering BRICS formation year, total period is divided into two sub-periods, pre- and post-BRICS periods. Short-run relationship has been measured through Granger causality, VAR, IRF and VDC. For long-run co-movement, Johansen co-integration is applied. To explain asymmetrical response of the market, E-GARCH Model is applied. Both Granger causality and VAR model confirm presence of short-run inter-linkages among BRICS during post-BRICS period. Johansen co-integration test also establishes more co-integrating equations during post-BRICS. E-GARCH result indicates a strong presence of asymmetry effect in the volatility of BRICS stock returns during post-BRICS and concludes the presence of leverage effect in all the BRICS markets. By integrating the findings with relevant literature, authors propose a framework that establishes BRICS formation, trade agreements and collaboration with each other has resulted into a strong relationship among BRICS nations during post-BRICS period and hints a little opportunity to global investors for portfolio diversification in short-run but no opportunity in the long-run.

Time-varying Stock Market Integration and Diversification Opportunities within Developed Markets Using Aggregated Data Approach

This study examines the time-varying feature of Developed stock markets to identify diversification opportunities. For this purpose, we sample 21 developed countries ranging from 2000-2018 from the Pacific Region, Northern Europe, Western Europe, Southern Europe, and G7, with each region consisting of a panel with one home country and other as remaining countries portfolio. We applied Panel co-integration and VECM to test the stock market integration and diversification opportunities in short and long run. Our results indicate few short and long-run diversification opportunities for international investors in the post-crisis period that are more relevant. Canada, Japan, and Italy have long-run opportunities for diversification in the G7, and only Japan has short-run opportunities for diversification. Hong Kong and Japan have short-and long-run opportunities for diversification in the Pacific region. In the Northern Europe region, we have only the short-run diversification option of the UK and Norway. In the Western European Region, Australia and Switzerland have long-term diversification. There are no long and short-run diversification opportunities in the Southern European Region in the post-crisis period.

Time-varying Stock Market Integration and Diversification Opportunities within Developed Markets Using Aggregated Data Approach

Time-varying Stock Market Integration and Diversification Opportunities within Developed Markets Using Aggregated Data Approach

Parental legacy versus regulatory innovation in salt stress responsiveness of allopolyploid cotton (Gossypium) species.

SUMMARYPolyploidy provides an opportunity for evolutionary innovation and species diversification, especially under stressful conditions. In allopolyploids, the conditional dynamics of homoeologous gene expression can be either inherited from ancestral states pre‐existing in the parental diploids or novel upon polyploidization, the latter potentially permitting a wider range of phenotypic responses to stresses. To gain insight into regulatory mechanisms underlying the diversity of salt resistance in Gossypium species, we compared global transcriptomic responses to modest salinity stress in two allotetraploid (AD‐genome) cotton species, Gossypium hirsutum and G. mustelinum, relative to their model diploid progenitors (A‐genome and D‐genome). Multivariate and pairwise analyses of salt‐responsive changes revealed a profound alteration of gene expression for about one third of the transcriptome. Transcriptional responses and associated functional implications of salt acclimation varied across species, as did species‐specific coexpression modules among species and ploidy levels. Salt responsiveness in both allopolyploids was strongly biased toward the D‐genome progenitor. A much lower level of transgressive downregulation was observed in the more salt‐tolerant G. mustelinum than in the less tolerant G. hirsutum. By disentangling inherited effects from evolved responses, we show that expression biases that are not conditional upon salt stress approximately equally reflect parental legacy and regulatory novelty upon allopolyploidization, whereas stress‐responsive biases are predominantly novel, or evolved, in allopolyploids. Overall, our work suggests that allopolyploid cottons acquired a wide range of stress response flexibility relative to their diploid ancestors, most likely mediated by complex suites of duplicated genes and regulatory factors.

Constraints to climate change adaptation and livelihood challenges: perspectives from the Sundarbans fishers' community in Bangladesh

Fishers' are first-line observers of changes in the Sundarbans region and are among the first to be affected by the changes that occurred. In the Sundarbans fishers' communities, transformations of society have always been a part of life. In contrast, environmental changes were always interim and reversible, allowing them to understand and identify with the Sundarbans ecosystems as food and life providers. In this study, fishers' observations on climate change impacts and their livelihoods were compiled and analysed using a structured questionnaire in accordance with the tenets of grounded theory. The observations of fishers from the region of the Sundarbans demonstrated a rise in the frequency of extreme weather events caused by rising temperatures and changes in the weather pattern. Physical components such as rainfall, coastal erosion, sea-level rise, siltation alterations in fish species distribution ranges, and migratory spawning behaviours were also affected by changes in the region's weather and climate. As salinity levels rose, the diversity and productivity of river ecosystems were affected, particularly in the most vulnerable areas. As a result, river freshwater flow decreased over time. A high rate of siltation in rivers and river mouths was considered another major concern that led to seasonal flooding due to its low freshwater upstream flow rate. The Sundarbans region provides a vast array of resources for diversifying fishers' livelihoods, but climate change is diminishing these alternatives due to more frequent catastrophic events. Specifically, climate change limits the resilience of fishers' communities, restricting opportunities for diversification or forcing them to leave their homes or villages. Climate change generated an environment that was generally unfavourable for all fishing communities. In order to survive in an unfavourable environment, the social well-being of fishers (mostly women and children) was negatively impacted by a variety of challenges, including disease, lack of potable water, malnutrition, sanitary difficulties, lack of electricity, lack of food and clothing, lack of proper medical care, and so on. To evaluate the effects of climate change on fisheries in the study area, the biodiversity, abundance, and production of most freshwater species are drastically reduced due to the destruction of spawning grounds, a transition in the spawning season, and the obstruction of fish migration. The findings of this study show that the climate and livelihood conditions of fishers in the Sundarbans region have changed significantly over the past few decades. Regardless of GOs and NGOs taking the required steps, proper implementation of interdisciplinary adaptive policy and regular monitoring in the Sundarbans fisher's community in Bangladesh could effectively reduce climate change impacts and improve livelihood conditions. Asian J. Med. Biol. Res. 2022, 8 (2), 103-114

Asset Correlation and the Optimal Portfolio Size Determination – Case of Nifty 50 and NASDAQ 100 Indices

Portfolio diversification benefits and optimum portfolio size depend on the internal correlation structure of the market. Investors require a small number of assets to get the maximum diversification benefit in a highly correlated market, however, such a market offers relatively lesser diversification opportunities. In the present study, the correlation for stock returns in India and the US was calculated to determine the optimal size of portfolios in the respective markets. Returns for all stocks indexed in NIFTY 50 and NASDAQ 100 were considered for calculating average correlations for Indian and U.S. markets between 2017 and 2019. The results showed higher correlations for the NASDAQ 100 in comparison to Nifty 50, indicating relatively better diversification opportunities provided by the Indian market as compared to the U.S. However, lower correlations for Nifty 50 required a larger number of assets to be included in the portfolio to diversify the unsystematic risk. Correlations between Nifty-50 and Nasdaq-100 indices for the past three years 2017–19 were also calculated. The results showed a relatively low correlation between the two indices, which is good for international diversification opportunities. In addition, the present study established a relationship of correlation structure between the two indices and foreign capital inflows in India for the respective years. This study also captured the cross-country returns and risks for the Indian and the U.S market.