Time-varying Stock Market Integration and Diversification Opportunities within Developed Markets Using Aggregated Data Approach

Abstract

This study examines the time-varying feature of Developed stock markets to identify diversification opportunities. For this purpose, we sample 21 developed countries ranging from 2000-2018 from the Pacific Region, Northern Europe, Western Europe, Southern Europe, and G7, with each region consisting of a panel with one home country and other as remaining countries portfolio. We applied Panel co-integration and VECM to test the stock market integration and diversification opportunities in short and long run. Our results indicate few short and long-run diversification opportunities for international investors in the post-crisis period that are more relevant. Canada, Japan, and Italy have long-run opportunities for diversification in the G7, and only Japan has short-run opportunities for diversification. Hong Kong and Japan have short-and long-run opportunities for diversification in the Pacific region. In the Northern Europe region, we have only the short-run diversification option of the UK and Norway. In the Western European Region, Australia and Switzerland have long-term diversification. There are no long and short-run diversification opportunities in the Southern European Region in the post-crisis period.