Summary
The objective of this paper is to examine the short and long-term relationships between the seven developed equity markets of United-States, Canada, United-Kingdom, France, Germany, Italy, Japan and three Central European emerging equity markets of Czech-Republic, Hungary and Poland in order to study their implications on the potential gains from international diversification in these emerging markets. The short-term relationships measured by the correlation matrix indicate a lower level of correlation between developed and emerging equity markets of Central Europe. In order to carry out the long-term relationships we resorted to Johansen cointegration techniques recently developed. The tests show that there is no long-term relationship between G7 developed equity markets and Central European emerging equity markets. Theses results indicate that the increase of financial integration degree and co-movement between equity markets has not significantly affected the expected benefits from international diversification in these emerging markets. These gains remain significantly important for the G7 industrial investors in the Central European emerging equity markets.
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Extract
An Empirical Examination of International Diversification Benefits in Central European Emerging Equity Markets
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I. INTRODUCTIONInternational portfolio diversification was started in with the decision of Morgan Guaranty in 1974 to invest a part of its pension fund outside the United-States. At that time, the US market lived two successive decreases in 1973 and 1974, but outside the United-States, the returns had been very attractive. Accordingly, the investors have become increasingly more active in foreign capital markets. The investment in international financial market knows a spectacular increase. Recently, as a consequence of market liberalisation, financial markets tended to become more integrated. This integration process implies the increase of correlation between financial markets which can have negative effects on benefits from international diversification. This later depends on markets correlations. If the correlation coefficients between markets are higher, the gains from international diversification are low. On the other hand, if the market correlation is low the gain is very important.The higher integration between develope...See the full content of this document
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