Benefits of diversification into emerging equity markets with changing correlations : an Australian perspective

The benefits of international equity diversification have been discussed extensively in theoretical and empirical research. Recently the role of the emerging equity markets has attracted investors’ interests who wish to hold an international equity portfolio. Much of the previous research has taken the viewpoint of an investor from a country with a significant economy in world terms and has assumed the correlations constant over time. This review focuses on research in the area from the perspective of an Australian investor. This review of research into international diversification indicates there are still benefits in diversifying internationally and all investors are expected to benefit from investing into emerging markets and, these benefits are expected to be more apparent for Australian investors. This study develops a theoretical framework for further research into the area and recommends using a time-varying correlation model, which can estimate the benefits of diversification more accurately.