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An investigation of the stability of returns in Western European equity markets

Author

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  • C. D. Sinclair
  • D. M. Power
  • A. A. Lonie
  • C. V. Helliar

Abstract

This paper investigates the temporal stability of various dimensions of the returns of 16 European stock markets that are relevant to an analysis of international portfolio diversification. The basic data consist of daily stock market price indices for these markets. This group of indices comprehends a wide range of stock markets differentiated by size, age and technological sophistication, but in each case located in Western Europe. Two main tests were conducted: (a) ANOVA to identify inter-temporal variability and inter-market variability over 24 three-month sub-periods from January 1989 to December 1994, and (b) cluster analysis to identify groups of markets that exhibit similar behaviour patterns. The findings suggest that, while the potential gains from an internationally diversified portfolio restricted to the equities of Western European markets appear to be substantial, the lack of inter-temporal stability in the composition of the optimal portfolio from one period to another makes these gains difficult to achieve in practice.

Suggested Citation

  • C. D. Sinclair & D. M. Power & A. A. Lonie & C. V. Helliar, 1997. "An investigation of the stability of returns in Western European equity markets," The European Journal of Finance, Taylor & Francis Journals, vol. 3(1), pages 87-106, March.
    • Handle: RePEc:taf:eurjfi:v:3:y:1997:i:1:p:87-106
    DOI: 10.1080/135184797337552
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    References listed on IDEAS

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    Cited by:

    1. S. G. M. Fifield & D. M. Power & C. D. Sinclair, 2002. "Emerging stock markets: a more realistic assessment of the gains from diversification," Applied Financial Economics, Taylor & Francis Journals, vol. 12(3), pages 213-229.

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