Returns, Volatilities and Correlations Across Mature, Regional and Frontier Markets: Evidence from South Asia

Our study investigates returns and volatilities across three tiers of financial markets: mature, regional-dominant and frontier. We examine correlations among these markets at both normal (tranquil) and turbulent (financial crisis) periods. We choose South East Asian financial markets that resemble a dominant oligopoly conditions, whereas news and shocks in the regional-dominant market of India significantly influence the behavior of frontier markets of Bangladesh, Pakistan and Sri Lanka. The empirical tests confirm our underlying hypothesis that the frontier markets still remain fundamentally de-coupled from the mature markets’ risks at normal periods. However at turbulent times, the contagion effects from the mature to the frontier markets become more pronounced. The results also suggest that the regional-dominant market plays a key role in disseminating shocks across the frontier markets during the normal times, while a similar contagion from the regional-dominant to the frontier markets is not observed during crisis periods