Active portfolio management for the emerging and frontier markets: the use of multivariate time series forecasts

Abstract

Employing both the mean-variance framework and the common portfolio risk-optimization, this study adds to the investment research by examining how ideal holdings for emerging and frontier markets (EFM) of the four global regions (Asian, Europe, and Commonwealth of Independent States (Eastern + Central), Africa, and Latin America and the Caribbean) differ from the benchmark (MSCI EFM (World) index) weights. MSCI previously stood for Morgan Stanley Capital International. The optimal weights were computed for the MSCI Asia, MSCI Europe, MSCI Africa, MSCI Latin America, and MSCI Caribbean for four unique schemes: historical variance (HV), global-minimum variance (GMV), μ-fixed minimum variance (MV), and market timing (MT). The portfolio study shows that the market timing (MT) portfolio performs well, with only the fixed minimum variance (MV) portfolio outperforming it overall. In terms of steady and positive returns in 2019 and beyond, the MT portfolio emerges as the best. Also, the volatility forecasts generated from multivariate time series models can be successfully converted into higher portfolio returns using quantitative investment approaches if the right balance of volatility modelling and portfolio strategy is determined. Given the well-functioning MT portfolio, this study offers some implications for scholars and funding managers based on the risk-return trade-off.

Keywords:

• emerging and frontier markets
• mean-variance optimisation model
• multivariate time series forecasts
• portfolio risk-optimisation
• volatility forecasting

JEL Classification Code:

• G11
• G17
• C32
• C58.

PUBLIC INTEREST STATEMENT

My research investigates the opportunities for diversifying a portfolio into emerging and frontier markets. The portfolio selections serve several goals, including risk mitigation and market timing (for example, trades based on forecasts of market price movements). The outstanding effectiveness of the market-timing strategy offers academics an intriguing path for study on alternative investment strategies. As research on market-timing strategies gains importance, fund managers have more technical possibilities for developing their investing options.

Acknowledgements

I wish to express my gratitude to the editor and two anonymous referees for their constructive suggestions. Any remaining faults are entirely my fault. My deepest gratitude to Professor Sử Đình Thành, my academic supervisor, for his committed, whole-hearted coaching and assistance during the completion of the paper as a part of my doctoral dissertation.

Disclosure statement

No potential conflict of interest was reported by the author.

Additional information

Funding

The author received no direct funding for this research.

Notes on contributors

Tri M. Hoang

Tri M. Hoang is a Ph.D. student at the University of Economics Ho Chi Minh City (UEH) in Vietnam, working under the guidance of Prof. Su Dinh Thanh. His thesis examines the diversification of asset returns in portfolio management for investors from emerging markets. This article is based on a section of his doctoral thesis. Tri M. Hoang is also a lecturer at Vietnam’s Ho Chi Minh City University of Technology (HUTECH). Behavioral finance and markets, as well as empirical asset pricing, are among his research interests.