Cointegration of International Stock Markets: An Investigation of Diversification Opportunities

Authors

Taimur A. Khan, Carleton CollegeFollow

Abstract

Abstract: This paper examines the long-run convergence of the United States and 22 other developed and developing countries. I use daily data and run the Johansen (1988) and the Gregory and Hansen (1996) test to show that stock markets of most countries have become cointegrated by 2010. I also look at short-run diversification opportunities across the countries by comparing their daily returns to the daily returns of the global index (S&P 1200). China, Malaysia and Austria stand out as countries with highly favorable diversification opportunities as they are not cointegrated about with the US and are insensitive to the global index. Finally, I use the relative risk of each country (obtained from the CAPM model) to measure performance of each country over the great recession of the 2000s. I find that the relative risk of a country is a good predictor of country performance in a recession.

Recommended Citation

Khan, Taimur A. (2011) "Cointegration of International Stock Markets: An Investigation of Diversification Opportunities," Undergraduate Economic Review: Vol. 8: Iss. 1, Article 7.
Available at: https://digitalcommons.iwu.edu/uer/vol8/iss1/7