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In the era of liberalization and globalization, investing community and academicians
are interested in investigating the movements of price indices of different
countries' stock markets. The interrelationship among these markets is studied and analyzed to explore
the possibilities of risk diversification and opportunities to earn higher returns. In order
to investigate the possible reasons for such
diversification, Grubel and Fadner (1971) found that there are gains from international diversification because returns in any one
country are influenced by natural and man-made catastrophes, business cycles and
government policies. Bodie et al. (1999)
were of the opinion that the risk of an internationally
diversified portfolio can be reduced to less than half of a diversified portfolio constructed by
stocks traded in the US stock markets.
In this context, many researchers have tried to find out the influence of the
American stock markets on the stock markets of other countries, especially the emerging ones. Eun
and Shim (1989) conducted a study for the period December 1979 to December 1985 and
found that the stock market of the US was the worldwide leader. Another study by Cheung and
Mak (1992) also found that the US market was the global factor leading both developed and
most of the Asian markets.
Using simple correlation analysis, Bailey and Stulz (1990) investigated the
interrelationship among various Pacific basin stock markets and the US stock markets. They concluded
that the empirical results differ for daily, weekly and monthly time series data. |
