Portfolio Diversification Benefits Research Articles

The Benefits of Diversification Between Bitcoin, Bonds, Equities and the US Dollar: A Matter of Portfolio Construction

This paper investigates the potential portfolio diversification between Bitcoin, bonds, equities, and the US dollar. We make use of two approaches for constructing the portfolio. The first is the standard minimum variance approach, and the alternative is based on combining risk and return when the portfolio is constructed. The portfolio based on the minimum variance approach does not result in increasing the return per unit of risk compared to the corresponding value for the best single asset, in this case, Bitcoin. However, the portfolio based on the approach that combines risk and return in the optimization problem does show a return per unit risk higher than the corresponding value for any of the four assets. Thus, the portfolio diversification benefit with respect to these four assets, in terms of return per unit risk, exists only if the portfolio is constructed via the new approach.

Emerging market portfolios and Islamic financial markets: Diversification benefits and safe havens

We examine the relationship between Islamic and conventional stock market returns to see if Islamic financial markets provide portfolio diversification benefits and safe havens during turbulent times. Using daily data from January 1996 through September 2020 we consider conventional emerging stock market returns and some Islamic stock market returns and examine their interactions using causality-in-variance, dynamic conditional correlations, optimal hedge ratios, and causality-in-risk tests. Causality-in-variance test results show causality between Islamic stock returns and all emerging stock returns which indicates Islamic markets provide limited safe havens. Results from both time-varying conditional correlations and the hedge ratios show that there are positive and significant correlations between emerging stock markets and Dow Jones Islamic Market Index, which implies limited portfolio diversification benefits afforded by Islamic stock markets.

COVID-19 pandemic and global financial market interlinkages: a dynamic temporal network analysis

ABSTRACT The present study investigates the changes in G20 stock market dynamics and their interlinkages in the aftermath of COVID-19. It utilizes the Detrended Cross-Correlation Analysis (DCCA) along with the network and complexity theories for detecting the contagion effect of the pandemic on the stock markets. We find that both advanced and emerging stock markets, departing from their pre-crisis structures, form a tightly coupled close community after the disease outbreak – except for China that distanced itself from the rest of the cohort. This indicates that COVID-19 has caused contagion in the global equity market, which has increased the risk to international portfolio diversification benefits. The adoption of the Network theory for contagion detection technique augments the detailed understanding of the structural changes and their interlinkages among the stock markets in a more comprehensive way.

Is portfolio diversification possible in integrated markets? Evidence from South Eastern Europe

A remarkable process of financial integration has taken place throughout the world capital markets over the last decades. In line with this integration process, the effect of financial integration locally and/or globally has been one of the contemporary topics of interest to academics, practitioners as well as policy makers. In this study, we investigate the availability of portfolio diversification benefits after the initiation of the South Eastern Europe Link (the SEE Link) trading platform in 2016 as a connecting hub for stock markets in the South Eastern European region. Our empirical methodology is primarily based on various static and dynamic correlation (Dynamic Conditional Correlation-GARCH) and regression (Autoregressive Distributed Lag, Fully Modified Ordinary Least Squares, Dynamic Ordinary Least Squares, Markov Switching Regression Model and Kalman Filter Model) analyses. We employ our methods for a daily frequency stock exchange (namely, the Zagreb Stock Exchange and Bulgarian Stock Exchange) return data between January 4, 2005 and December 30, 2019. The findings reveal that the two stock exchanges have a significantly decreasing pattern of correlation and regression relationship over the sample period implying the existence of diversification opportunities in the SEE Link markets.

Islamic Index vs Conventional Index: Is There Any Portfolio Diversification Benefit Between KMI 30, KSE 30 and KSE 100?

Islamic Index vs Conventional Index: Is There Any Portfolio Diversification Benefit Between KMI 30, KSE 30 and KSE 100?

Are Strategies for International Diversification by Country, Industry and Region Equivalent?

In this study, we examine whether international portfolio diversification still matters despite an increase in the cross-country correlations of assets returns. More specifically, we explain why an increase in global return correlations does not necessarily imply a reduction in the benefits of international portfolio diversification. We also propose to compare empirically two traditional strategies of international diversification (by country and industry) in addition to a new strategy (by region) using two different methodological approaches, namely the mean variance spanning and multivariate cointegration analysis. Over the full sample period (1994- 2008), our results suggest that the three strategies of international diversification remain effective despite the secular increase in the cross-country return correlations. When we divide the sample into two different sub-periods (1994-2000 and 2000-2008), the findings indicate that the strategy based on regional diversification proved to be a new competing strategy during the second period in comparison to the other two traditional strategies.

Information spillovers and dynamic dependence between China’s energy and regional CET markets with portfolio implications: New evidence from multi-scale analysis

Global climate change caused by human activities has posed a huge threat to the environmental governance and sustainability of human-being. Fortunately, the carbon emission trading scheme, a powerful tool for reducing carbon emissions, has been established in many countries to slow catastrophic climate change thus promoting human well-being. The nexuses between energy and European carbon markets have been extensively studied due to the grim reality of global climate change. However, no literature to date has examined the multi-scale associations between China’s energy and regional CET markets. This paper aims to fill this gap by utilizing a proposed wavelet-based multi-scale investigation framework to explore the information spillovers and dynamic dependence over different time horizons. The original energy and carbon return series are decomposed by the MODWT method. The TVP-VAR-based connectedness and the DECO-FIGARCH model are then built at each selected wavelet component. The wavelet coherence method is also applied to depict the time-frequency dependence. The empirical results demonstrate that the information spillovers at multivariate time-scales are heterogeneous. Generally, GDEA and the crude oil markets act as the information spillover net-transmitters at the raw data level and all wavelet scales. The dynamic spillovers present significant time-varying features and a similar evaluation trajectory. Besides, we offer strong evidence of a low dynamic equicorrelation between China’s energy and regional CET markets, suggesting the portfolio diversification benefits. Furthermore, the information spillover and dependence are proved to be more significant at longer time horizons. Finally, the energy-carbon portfolios offer diversification opportunities, and the risk reduction effectiveness varies with wavelet scales. Moreover, the optimal-weighted portfolio exhibits the best risk management performance. • Wavelet-based multi-scale spillover and dependence analysis framework is proposed. • MODWT is applied to decompose the original data into various wavelet components. • TVP-VAR-based connectedness is utilized to quantify the information spillovers. • Wavelet-based-DECO-FIGARCH model is employed to examine the dynamic dependence. • Wavelet coherence method is used to depict the time-frequency dependence structure.

Portfolio Diversification Benefits in Southeast Asian Stock Markets for Turkish Investors

This study is a pioneering attempt at investigating portfolio diversification benefits available to the Turkish conventional and Shari’ah-compliant investors in the Southeast Asian conventional and Islamic stock markets at different investment horizons. We use multivariate-generalized autoregressive conditional heteroscedastic (MGARCH-DCC) and wavelet approaches. The results suggest that the Malaysian stock market offers substantial diversification benefits for the Turkish conventional and Islamic investors, especially for the short-run investment horizons up to 16 days, as well as for long-term investment periods exceeding 128 days. In addition, Turkish conventional investors could also consider investing in Thailand Islamic equities in short-run holding periods up to 16 days. As for the medium investment horizons from 16 to 128 days, it is advisable for the Turkish investors to avoid investing in all the equities because of very low diversification benefits.

Should investors include bitcoin in their portfolio? New evidence from a bootstrap-based stochastic dominance approach

ABSTRACT This paper investigates the potential portfolio diversification benefits by introducing the Bitcoin to the traditional diversified financial portfolio. Using a bootstrap-based stochastic dominance (SD) test and daily prices of the commodity and stock market indices, we find that the introduction of Bitcoin improves the performance of the traditional financial portfolio and the optimal portfolio choice changes according to the market regime. Principally, results show that the optimal portfolio diversification combining Bitcoin, US stock market and commodities indices can be a good hedge, offering risk-averse, more performing portfolio investments during any financial crisis.

The power of diversification: Do African fixed-income investors have a chance in Malaysian Sukuk market?

PurposeThis study investigates the presence of portfolio diversification benefits for South African, Nigerian, Ghanaian and Kenyan fixed-income investors diversifying bond portfolios in the Malaysian sovereign Sukuk market.Design/methodology/approachThe paper uses wavelet coherence and a multivariate generalized autoregressive conditional heteroscedastic (GARCH) model. The data cover the period from September 2013 to January 2019.FindingsThe findings obtained from the wavelet coherence model reveal evidence of portfolio diversification opportunities for African fixed-income investors in the Malaysian sovereign Sukuk market. These opportunities are more significant in the short- and medium-term investment horizons than in the long-term. Also, the results of multivariate GARCH show that the Malaysian Sukuk market has a negative unconditional correlation with the South African bond market, signifying better diversification benefits for these investors.Practical implicationsThe findings have implications for both fund managers and investors intending to include Sukuk in a diversified portfolio to reduce their risks and maximize their return from bonds.Originality/valueTo the best knowledge of the authors, this is the first study to examine the opportunities for African investors in the Malaysian Sukuk market.

Faith‐based versus value‐based finance: Is there any portfolio diversification benefit between responsible and Islamic finance?

AbstractThe aim of the study is to explore whether responsible investment and Islamic (Shari'ah‐compliant) investment, which have many similarities in objectives but some differences in how they are implemented, hold any diversification benefits for investors across a variety of investment horizons. We adopt an advanced econometric estimation using MGARCH‐DCC and wavelet using daily returns data between January 1, 1997, and May 22, 2017. We find indications that responsible investment strategies can offer some hedging benefit to Islamic investors and vice versa. Moreover, the returns from this hedging strategy are higher for those addressing a shorter‐term rather than long‐term investment horizon. One exception was that we found diversification benefits for both short‐ and long‐term focused investors during the financial crisis, when the time‐varying correlation were near their lowest point.

The static and dynamic connectedness of environmental, social, and governance investments: International evidence

We investigate the connectedness of the most significant global equity indices that comprise companies with the highest environmental, social, and governance (ESG) performance. Motivated by the rapid growth of socially responsible investing during the last two decades, we examine whether these investments are prone to similar exogenous economic and financial shocks as their conventional counterparts. Employing a variety of influential macroeconomic and financial variables over the period 10/1/2007–4/15/2020, we document statistically significant and consistent transmissions between the employed equity indices throughout the sample period. In particular, the connectedness exhibits dynamic patterns during three periods: the European sovereign debt crisis, the systemic Greek problems, and the outbreak of the coronavirus pandemic. We also find that developed equity markets are the shock transmitters to Asian and other emerging markets. Our results highlight the risk of contagion and the diminishing portfolio diversification benefits of these equity indices during turbulent periods.

Price Dynamics in Public and Private Commercial Real Estate Markets

In this paper, we examine price dynamics, cycles and lead-lag relationships between private and public commercial real estate markets. We utilize wavelet technology to capture both the frequency and the time variations of a time series. We find that the long-run trend of prices in public commercial real estate markets is steeper than that of private commercial real estate markets. In addition, both short-term and long-term cycles are longer in the public market than the private market. We also find that the private market led the public market up until the recession of early 1990s and the public market has led the private market since then. Finally, we offer the first evidence of contagion between the two markets. We find that there is an increase in excess (high frequency) contagion between the two markets during periods of crisis, but not beyond the crises periods. An understanding of co-movements of real estate prices across these two markets is of crucial importance policy makers and for maximizing portfolio diversification benefits and managing risk.

Dynamics among global asset portfolios

We examine the dynamic correlations among several global financial assets with an eye to potential portfolio diversification benefits during the 2008 US financial crisis and EMU sovereign debt crisis of the 2010s. Our findings are summarized as follows: First, evidence for rigorous, dynamic cross-correlations among global equities around the 2008 crisis suggested a weak global diversification potential. Second, financial spillovers strengthened in the post-crisis period thus, exhibiting cycles of inter-linkages among various assets classes. Third, heterogeneous global portfolios (that is, portfolios formed by various asset classes) offered greater returns than homogeneous portfolios for the whole period and especially in the period preceding the 2008 crisis. Overall, we conclude that the US and EMU crisis periods did not affect assets in the same way and hence, risk managers should follow portfolio-construction strategies with risk-offsetting assets (such as commodities) with regard to their cyclical/countercyclical movements.

Cryptocurrencies in portfolios: return–liquidity trade-off around China forbidding initial coin offerings

ABSTRACT We examine diversification when cryptocurrencies are included in investment portfolios, around China prohibiting initial coin offerings on 4 September 2017. We discover, once we account for liquidity, that all portfolio diversification benefits of cryptocurrencies are eliminated.

Time-Frequency Based Dynamics of Decoupling or Integration between Islamic and Conventional Equity Markets

This paper investigates the decoupling and integration between the region-wise (Asia, Europe, Africa and the Americas) developed and emerging market’s equity pairs of Islamic and conventional stock returns with the focus on multi-horizons. In doing so, daily wavelet and ADCC-based stock returns correlations are estimated to capture the dynamics of time-frequency and the time-domain based correlations, respectively. The findings of this study indicate that at the short-term horizon, the all selected emerging and developed Islamic and conventional equity markets across all regions depict a high positive correlation, suggesting a rejection of the decoupling hypothesis. However, it is accepted for some of the developed markets of the Pacific region (Hong Kong and New Zealand), Europe (Ireland, Denmark and Spain) and emerging markets of Asia (China), Europe (Czech Republic) and Americas (Argentina and Peru) at a medium-term horizon. Moreover, in an examination of the comparative behaviors of the wavelet and ADCC-based Islamic-conventional correlations, the observed transitional behavior has been exemplified as the difference between the time-frequency and time-domain analysis. This study provides fruitful insights for investors who opt for cross-asset allocation and seek maximum portfolio diversification benefits.

Global uncertainties and portfolio flow dynamics of the BRICS countries

This paper investigates the dynamics of bond and stock market capital flows to BRICS countries under uncertainties such as global economic policy uncertainty and the US trade policy uncertainty. We use a time-varying Granger causality framework over the January 2008-November 2019 period to analyze the predictive power of uncertainties on capital flows in the form of bond and equity. The results show that the effects are heterogeneous across countries and stronger during the Global Financial Crisis period and post-2018 period while it lost its significance in the subsequent period. The negative influence of uncertainties on capital flows directed to BRICS countries is also evident in the results of non-parametric time-varying panel models. Overall, it is thought that the heterogeneous structure of the causality between uncertainty and portfolio flows into BRICS may present portfolio diversification benefits for global investors.

The added-value role of industrial and logistics REITs in the Pacific Rim region

PurposeAs significant listed property investment vehicles, industrial and logistics REITs (I&L REITs) have recently enhanced their property portfolios, often replacing the traditional industrial properties with logistic properties to gain strategic exposure to recent e-commerce trends. This paper aims to assess the investment performance of I&L REITs by assessing the significance, risk-adjusted performance and portfolio diversification benefits of I&L REITs in the Pacific Rim region from July 2011 to December 2018. The strategic property investment implications for I&L REITs are also identified.Design/methodology/approachMonthly total returns from July 2011 to December 2018 were used to analyse the risk-adjusted performance and portfolio diversification benefits for I&L REITs in the United States, Japan, Australia and Singapore. An asset allocation diagram was employed to assess the strategic role of I&L REITs in a mixed-asset portfolio in each case.FindingsI&L REITs generally possessed superior average annual returns compared with the other sub-sector REITs, stocks and bonds in the United States, Japan, Australia and Singapore between July 2011 and December 2018, with desirable portfolio diversification benefits. Importantly, a more significant role for I&L REITs was generally observed in the mixed-asset portfolio compared to the other sub-sector REITs in each of these four markets across the broad portfolio risk spectrum. This reflects I&L REITs delivering enhanced portfolio returns and offering portfolio diversification benefits in a mixed-asset portfolio in the United States, Japan, Australia and Singapore.Practical implicationsProperty investors, particularly property securities funds (PSFs) and income-oriented investors, should consider including I&L REITs in their mixed-asset portfolios, as Pacific Rim–based I&L REITs provided an attractive REIT investment sub-sector, co-existing alongside the other sub-sector REITs and major asset classes in a mixed-asset portfolio in a Pacific Rim context, as well as being a portfolio diversifier. These results confirm the added-value and strategic role of I&L REITs in a mixed-asset portfolio, seeing I&L REITs as an effective investment pathway for I&L property exposure in the Pacific Rim region.Originality/valueThis is the first study to assess the investment performance of I&L REITs in the Pacific Rim region, evaluating their significance, risk-adjusted performance and portfolio diversification benefits, and the role of I&L REITs in a mixed-asset portfolio in the United States, Japan, Australia and Singapore. More importantly, this research is the first paper to provide empirical evidence on I&L REITs, which have often transformed their traditional industrial property portfolios with increased levels of logistics property to gain exposure to recent e-commerce trends. This research enables more informed and practical property investment decision-making regarding I&L REITs and their added-value and strategic role in a mixed-asset portfolio, as well as delivering effective I&L property exposure in the Pacific Rim region, with the added benefits of liquidity, transparency and fiscal efficiency.

A global investment opportunity in non-listed infrastructure for institutional investors

PurposeInfrastructure investment is one of the few high-calibre real alternative assets with a strong prominence in the portfolios of institutional investors, especially those with a liability-driven investment strategy. This has seen increased institutional investor interest in infrastructure for reasons such as diversification benefits and inflation hedging abilities, resulting in the substantial growth in non-listed and listed investment products offering access to the infrastructure asset class, and complementing the existing route via direct investment. This paper aims to assess the investment attributes of non-listed infrastructure over Q3:2008–Q2:2019, compared with other global listed assets of infrastructure, property, stocks and bonds.Design/methodology/approachQuarterly total returns were derived from the valuation-based MSCI global non-listed quarterly infrastructure asset index over Q2:2008–Q:2019, which were then filtered to decrease the valuation smoothing effects. A similar set of returns data was also collected for the other global asset classes. The average annual return, annual risk, risk-adjusted performance and portfolio diversification benefits for non-listed infrastructure and other asset investment classes were then computed and compared. Lastly, a constrained optimal asset allocation analysis was performed to validate the performance enhancement role of global non-listed infrastructure in a mixed-asset investment framework.FindingsGlobal non-listed infrastructure delivered the strongest average annual total return performance, outperforming the other asset classes and provided investors with total returns that linked strongly with inflation. Global non-listed infrastructure also provided investors with one of the least volatile investment returns because of its ability to ensure predictable total returns delivery. This means that on the Sharpe ratio risk-adjusted return basis, non-listed infrastructure was also the strongest performing asset. This performance was also delivered with significant portfolio diversification benefits with all assets, resulting in non-listed infrastructure contributing to the mixed-asset portfolios across the entire portfolio risk spectrum.Practical implicationsAside from better risk-return trade-offs, institutional investors are getting more secular with their portfolios for alternative assets that are able to provide other investment benefits such as predictable long-term performance and inflation-linked returns. A further improvement in performance and diversification benefits could be achieved by enriching existing investment portfolios with real alternative assets, one of which is the infrastructure asset class. For institutional investors, having exposure to and being part of the development, delivery and management of infrastructure assets are important, as they are one of the few real assets having considerable significance in the context of society, economy and investment needs.Originality/valueThis is the first research paper that empirically investigates the investment attributes of the non-listed infrastructure at a global level. This research enables empirically validated, more informed and practical decision-making by institutional investors in the infrastructure asset class, especially via the non-listed pathway. The ultimate aim of this paper is to empirically validate the strategic role of non-listed infrastructure as an important alternative asset in the institutional real asset investment space, as well as in the overall portfolio context.

Bitcoin—A hype or digital gold? Global evidence

AbstractThis study explores whether Bitcoin constitutes as a hedging instrument whilst seeking portfolio diversification opportunities among sustainable, conventional and Islamic asset classes since Bitcoin emerges as a distinct alternative investment and asset class across the world. We apply multivariate generalised autoregressive conditional heteroscedastic‐dynamic conditional correlation and continuous wavelet transforms based on the recent data set ranging from August 18, 2011, to September 10, 2018. First, our findings show that Bitcoin returns are mean‐reverting which implies that its value tends to come down to mean value in the long run and not completely crushed to zero irrespective of price changes suggesting Bitcoin as a sustainable asset class. Second, the time‐invariant model shows that Bitcoin offers portfolio diversification opportunities with almost all equity indices, in particular, Dow Jones Islamic followed by FTSE 4 Good index. Finally, the time‐variant analysis reconfirms that Bitcoin offers portfolio diversification benefits both in the short and long run. These findings carry meaningful policy considerations for fund managers and cross‐country investors.