How prone are emerging markets' sectoral indices to global uncertainties? Evidence from the quantile connectedness approach with portfolio implications

Shabeer Khan*, Mohd Ziaur Rehman, Mohammad Rahim Shahzad, Naimat U. Khan, Lutfi Abdul Razak

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

Purpose: There has been a burgeoning interest in exploring the impact of uncertainty factors on share returns. However, studies on the influence of global financial uncertainties on emerging market sectoral indices are scarce. Thus, there is a need to have a thorough investigation of the connection between global financial uncertainties and emerging market sectoral indices. To fill this gap, using the theoretical framework of international portfolio diversification (IPD) and utilizing data from 2008 to 2021, this study examines the spillover connection between global uncertainty indices (GUIs) and leading sectoral indices of 28 emerging markets. Design/methodology/approach: The authors employ the quantile spillover-based connectedness approach and minimum connectedness portfolio approach to explore the dynamic connectedness among sectoral indices and global uncertainty indices (GUIs) as well as portfolio implication. Findings: The study found high connectedness among all indices, especially at higher and lower quantiles. Among GUIs, the authors find that stock market volatility (VIX) and oil volatility index (OVX) are strongly interconnected with all leading emerging markets' sectoral indices. Among sectoral indices, the linkage between the financial (F-Index), information technology (IT-Index), and consumer discretionary (CD-Index) sectors shows moderate interconnectedness. In contrast, the communication services (CS-Index) sector has low interconnectedness with the system. In terms of spillover effects, the authors find EVZ, OVX, and the IT sectors to be net recipients for the entire period. The authors also explored portfolio diversification benefits by employing a minimum connectedness portfolio approach. The cumulative returns' findings show a slight decline in the portfolio's value after 2010; during 2012, the pattern remained stable; from 2014 to 2020, the portfolio performed negatively, that is, underperformance due to different events in that period, including COVID-19. The Consumer Discretionary sector is found to be significant because of having the largest weight, 51%, in the portfolio during the study period. Practical implications: The study suggests that investors should invest in the communication services sector as it is the least connected. However, the connectedness increases during COVID-19, which implies that it may be difficult for investors to benefit from IPD in a crisis period. Hence, to obtain the benefits from IPD, the evidence suggests that investors need to consider Consumer Discretionary sector while considering assets for investment. Originality/value: The study's uniqueness is that the authors have investigated spillover between GUIs and 28 emerging markets sectoral indices by employing a quantile spillover-based connectedness approach and minimum connectedness portfolio approach with a special focus on portfolio implication.

Original languageEnglish
JournalInternational Journal of Emerging Markets
DOIs
Publication statusPublished - 17 Jul 2023
Externally publishedYes

Keywords

  • Connectedness
  • Dynamic portfolio analysis
  • Emerging markets
  • Global uncertainty indices
  • Quantile VAR
  • Uncertainty

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