Emerging markets of South-East and Central Asia: Do they still offer a diversification benefit?

The aim of this paper is to check whether, despite the growing world economic integration and progressive lifting of capital controls, emerging markets still offer international investors a valuable diversification benefit. The study covers emerging markets from South-East Asia (Indonesia, the Philippines and Malaysia) and Central Asia (Korea, Taiwan, China and India) over the period 31st August, 1999 to 29th August, 2003 (a period characterised by both bull and bear stock markets), with the US, the UK and Japan as the reference ‘established’ markets. It uses several state-of-the-art techniques: multivariate cointegration and vector autoregression models (VARs) with the analysis of variance decomposition (VDC), time-varying correlations with Kalman filter models and the computation of conditional variances and covariances to devise optimal investment portfolios.