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Robust Global Stock Market Interdependencies


Brian M Lucey, School of Business Studies, Trinity College Dublin, Dublin 2, Ireland and Caledonian Business School, Glasgow Caledonian Univeristy, Cowcaddens Road, Glasgow G4 0BA, Scotland
Cal Muckley, Smurfirt Business School, University College Dublin, Dublin 4, Ireland


IIIS Discussion Paper No. 353

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 longer 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 longterm
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




Last updated 28 August 2014 by IIIS (Email).