Market Integration, Portfolio Correlation: A DCC Analysis For Seven Asian Emerging Markets

This research empirically investigates the market integration impact on the correlation between the local market portfolio and the regional market portfolio, for seven Asian emerging markets. Using the Dynamic Conditional Correlation (DCC) model, the unconditional correlation in DCC model is allowed to depend on the time-varying levels of the local market integration and the regional market integration. The results suggest that the correlation between the local emerging market portfolio and the regional market portfolio is time-varying and dynamic, and both the local market integration and the regional market integration have had impacts on the correlation. Further analysis is carried to explain these impacts, using wealth-constraint (WC) theory and portfolio-rebalancing (PR) theory.