A study of linkages between frontier markets and the U.S. equity markets using multivariate GARCH and transfer entropy

• Volatility spillover models evaluate co-movements of US stock and frontier markets.
• Geographical proximity of markets does not result in higher volatility spillovers.
• The housing market crisis resulted in an increase in conditional correlations.
• These correlations warn that investing in frontier markets may be overstated.
• European frontier markets show the need for diversification beyond a certain region.

This paper studies the integration of 20 frontier equity markets with the U.S. equity markets using variance ratios, conditional correlations and transfer entropies. The results show considerable regional variation in the level of integration. The volatility transfers, conditional correlations and transfer entropy are significantly affected by the housing market crisis of 2008–2009. The European debt crisis of 2011–2012 has less significant impact on the integration measures.