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The Co-Movements of National Stock Markets and Global Portfolio Diversification: 2001-2010

Author

Listed:
  • Ilhan MERIC

    (College of Business Administration, Rider University, Lawrenceville , NJ 08648")

  • Benjamin EICHHORN

    (College of Business Administration, Rider University, Lawrenceville , NJ 08648")

  • Charles McCCALL

    (College of Business Administration, Rider University, Lawrenceville , NJ 08648")

  • Gulser MERIC

    (Rohrer College of Business, Rowan, University, Glassboro, NJ 08028)

Abstract

Global portfolio diversification is recommended because of low correlation between national equity markets. However, recent empirical studies find that correlation between national stock markets has been increasing and the benefit of global portfolio diversification has been decreasing. In this paper we test this hypothesis by using the principal components analysis methodology with data from 38 global stock markets for the 2001-2010 period. We divide this 10-year period into two consecutive 5-year periods and we apply principal components analysis to each sub-period separately. We find seven statistically significant principal components for the 2001-2005 period and only three statistically significant principal components for the 2006-2010 period. Our findings indicate that the co-movements of global stock markets have become significantly closer and the global portfolio diversification benefit has decreased considerably during the 2001-2010 period.

Suggested Citation

  • Ilhan MERIC & Benjamin EICHHORN & Charles McCCALL & Gulser MERIC, 2011. "The Co-Movements of National Stock Markets and Global Portfolio Diversification: 2001-2010," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 8, pages 87-98, December.
    • Handle: RePEc:aic:revebs:y:2011:i:8:merici
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    References listed on IDEAS

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    1. Meric, Ilhan & Meric, Gulser, 1989. "Potential gains from international portfolio diversification and inter-temporal stability and seasonality in international stock market relationships," Journal of Banking & Finance, Elsevier, vol. 13(4-5), pages 627-640, September.
    2. Arshanapalli, Bala & Doukas, John, 1993. "International stock market linkages: Evidence from the pre- and post-October 1987 period," Journal of Banking & Finance, Elsevier, vol. 17(1), pages 193-208, February.
    3. Lau, Sie Ting & McInish, Thomas H., 1993. "Comovements of international equity returns: A comparison of the pre- and post-October 19, 1987, periods," Global Finance Journal, Elsevier, vol. 4(1), pages 1-19.
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    More about this item

    Keywords

    Co-Movements of Global Stock Markets; Global Portfolio Diversification;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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