Global Stock Market Interdependencies and long-term Portfolio Diversification

25 Pages Posted: 10 Oct 2010 Last revised: 14 Oct 2010

See all articles by Brian M. Lucey

Brian M. Lucey

Trinity Business School, Trinity College Dublin; University of Sydney Business School; Ho Chi Minh City University of Economics and Finance; Jiangxi University of Finance and Economics

Cal B. Muckley

University College Dublin

Date Written: October 7, 2010

Abstract

In this paper, we examine the scope for international stock portfolio diversification, from the viewpoint of a United States representative investor, in regard to both the Asian and the European stock markets. Our findings indicate that despite correlation style evidence to the contrary, the European stock markets provide a superior long-term diversification opportunity relative to that provided by the Asian stock markets. Hence, a short-term measurement of interdependence appears to be uninformative with respect to the diversification opportunities of investors with long-term investment horizons. In terms of methodology, we adopt common stochastic trend tests, including a common stochastic trend test which accounts for generalised autoregressive conditional heteroskedasticity effects in conjunction with the recursive estimation of these tests to estimate the development of long-term stock market interdependence linkages. Recursively estimated robust correlations between the international stock markets are utilised to reveal the nature of short-term stock market interdependence linkages.

Keywords: Stock Market Linkages, Portfolio Diversification, Correlation, Cointegration

JEL Classification: F3, G1

Suggested Citation

Muckley, Cal B. and Lucey, Brian M., Global Stock Market Interdependencies and long-term Portfolio Diversification (October 7, 2010). Available at SSRN: https://ssrn.com/abstract=1688944 or http://dx.doi.org/10.2139/ssrn.1688944

Brian M. Lucey

Trinity Business School, Trinity College Dublin ( email )

The Sutherland Centre, Level 6, Arts Building
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University of Sydney Business School ( email )

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Australia

Ho Chi Minh City University of Economics and Finance ( email )

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6th Ward, District 3
Ho Chi Minh City, Ho Chi Minh 70000
Vietnam

Jiangxi University of Finance and Economics ( email )

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Nanchang, Jiangxi 330013
China

Cal B. Muckley (Contact Author)

University College Dublin ( email )

Blackrock, Co. Dublin
Ireland
+353-1-716-8091 (Phone)

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