DIVERSIFICATION IN INTERNATIONAL STOCK EXCHANGES: AN EMPIRICAL ANALYSIS OF DEVELOPED AND EMERGING COUNTRIES

Abstract

This research contributed to the fields of international finance and portfolio risk management, having aimed at identifying if international stock exchanges still bring diversification benefits to investors. Monthly data of the returns obtained in stock exchanges of 12 countries, for the past 12 years, were analyzed through econometric models, such as VAR and Principal Components Analysis, in order to identify the dynamic relationship of those markets. This research not only identified two different investment blocks (USA, UK, Switzerland, versus Thailand, Japan and India), but also spotted that Brazil is closer to the block of developed western countries, while South Africa is more aligned with the Asian markets. Canada and Australia have been neutral investment options. Results confirmed that arm of portfolio management literature that indicates that, despite the growing correlation among international stock exchanges, they can still provide diversification benefits to investors.