International Portfolio Diversification using Co-Integration Approach: Evidence from BRICS Countries

Abstract

The dynamics of the world economy are changing continuously and the economic development across the globe have made the emerging economies a major center of investment. The possibility of international portfolio diversification among the BRICS countries may help investors maximize their utilities by earning a higher return with a given level of risk. Thus, the main purpose of this study is to investigate the international portfolio diversification benefits and to assess the short- and long-term integration of the BRICS stock markets based on the variance covariance and innovation covariance matrix. Furthermore, the study has also applied MAD tracking error and SD tracking error in order to track the constructed portfolio whether it is mimicking its benchmark or not. The study used the weekly prices data set of the stock markets over the period of January 2009 to December 2019. The empirical results showed that BRICS portfolio risk based on innovation covariance matrix is lower than that of calculated via variance covariance matrix. Besides, BRICS indices have low integration in the long run as compared to the short run. Furthermore, the results indicate that BRICS portfolio risk and return are no different from its benchmark both in long and short run thus, it is mimicking its benchmark. The findings of this study is useful for the portfolio managers.