International portfolio diversification : evidence from European emerging markets

Abstract

This paper examines the short-term and long-term relationships among eight European stock markets from 2000 to 2008. Three of these markets are considered mature: Euronext, Germany and Greece. The remaining five are considered emerging: Bulgaria, Cyprus, Romania, Slovenia and Turkey. We apply exhaustive statistical and econometric tests together with long-run cointegration and correlation analyses that yield mixed results concerning the markets’ relationships. We switch to a dynamic model of different interval moving averages, comparing the outcomes and revealing the individual characteristics of each market. The results are robust to sensitivity analysis based on partitioning the sample into multiple sub-periods and on translating indices to the Euro, the common currency for practically all of the markets. In addition, the Euronext and Germany stock exchanges serve as benchmarks and each equity market is examined from their point of view. Evidence shows that equity integration is existent, making international portfolio diversification less effective.