Faculty Scholarship 1994 - Present

Co-Movements of US and EU Equity Markets: Portfolio Diversification Implications

This paper studies the co-movements of the U.S. and fourteen E.U. equity markets with weekly index returns data for the June 1995-May 2005 period. The rolling correlation analysis results indicate that correlation between the U.S., French, German, and U.K. equity markets has been increasing and the portfolio diversification benefit of investing in these equity markets has been decreasing. The principal components analysis technique is used to group the fifteen equity markets into two statistically significant principal components in terms of the similarities in their index return movements. To maximize the portfolio diversification benefit, global investors should invest in the equity markets with the highest factor loadings in different principal components. The Granger-causality test results indicate that there are significant lead/lag linkages between most of the equity markets. To maximize the portfolio diversification benefit, global investors should avoid investing in the equity markets with significant lead/lag linkages. Our combined principal components analysis and Granger-causality test results indicate that U.S. investors can obtain the greatest portfolio diversification benefit by investing in the Greek equity market.