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Common Stochastic Trends in Emerging Equity Markets

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  • Ian Garrett
  • Spyros Spyrou

Abstract

Evidence suggests that stock markets in industrialized economies are increasingly integrated with the presence of common trends amongst national stock market indices. This implies that in the long run there is little gain from diversifying portfolios internationally. We investigate the existence of common trends in the increasingly important emerging equity markets of the Latin American and Asia‐Pacific regions. While we find evidence of common trends, we argue that this in itself does not rule out long‐run benefits to diversification. Examination of the composition of the common trends reveals that some countries do not enter that region’s common trend and returns in some countries do not react to movements in the common trend, a result that generalizes to the inclusion of both the USA and the UK. Thus, even though common trends are detected, their impact is very limited and therefore emerging equity markets offer benefits in terms of diversification, even in the long run.

Suggested Citation

  • Ian Garrett & Spyros Spyrou, 1999. "Common Stochastic Trends in Emerging Equity Markets," Manchester School, University of Manchester, vol. 67(6), pages 649-660, December.
  • Handle: RePEc:bla:manchs:v:67:y:1999:i:6:p:649-660
    DOI: 10.1111/1467-9957.00173
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    Cited by:

    1. Eleni Constantinou & Avo Kazandjian & Georgios P. Kouretas & Vera Tahmazian, 2008. "Common Stochastic Trends Among The Cyprus Stock Exchange And The Ase, Lse And Nyse," Bulletin of Economic Research, Wiley Blackwell, vol. 60(4), pages 327-349, October.
    2. William Miles, 2005. "Do frontier equity markets exhibit common trends and still provide diversification opportunities?," International Economic Journal, Taylor & Francis Journals, vol. 19(3), pages 473-482.
    3. Hyde, Stuart J & Bredin, Don P & Nguyen, Nghia, 2007. "Correlation dynamics between Asia-Pacific, EU and US stock returns," MPRA Paper 9681, University Library of Munich, Germany.
    4. Diamandis, Panayiotis F., 2009. "International stock market linkages: Evidence from Latin America," Global Finance Journal, Elsevier, vol. 20(1), pages 13-30.
    5. Jeffrey Jarrett & Zhenzhen Sun, 2011. "Evidence and explanations for the association among six Asian (Pacific-Basin) financial markets," Applied Economics, Taylor & Francis Journals, vol. 43(12), pages 1485-1496.
    6. Ajaya Kumar Panda & Swagatika Nanda, 2018. "A GARCH Modelling of Volatility and M-GARCH Approach of Stock Market Linkages of North America," Global Business Review, International Management Institute, vol. 19(6), pages 1538-1553, December.

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