Long-Run Diversification Potential in Emerging Stock Markets

In this paper we use cointegration tests to examine the long‐run diversification potential of 13 emerging capital markets. The Johansen [18] and Johansen and Juselius [19] cointegration procedures are applied to the U.S. and 13 emerging capital markets in three geographical regions of the world. None of the three regions examined possesses cointegrated markets. The lack of cointegration indicates that the correlation between returns from each market is independent of the investment horizon Return correlations using weekly data correspond to the long‐run investment horizon correlation. Correlations among the returns from these countries are low on average and occasionally negative. The apparent independence of markets within these three emerging regions suggests that diversification across these countries is effective.