International Diversification Benefits : A Cointegrating Analysis Based on China, Europe and Russia

Abstract: This thesis investigates the short term and the long term cointegration relations between European and Chinese, European and Russian stock markets, with a goal to define international diversification benefits. Whereas Russia and China are considered as developing countries, Europe represents a developed market. The period of study is from 1997 to 2018, which considers the global 2007-2008 financial crisis as a shift in the equilibrium.The static cointegration long run findings demonstrate scope for diversification benefits for the all observing markets over the whole period. With regard to the sub periods (before and after the global financial crisis), the outcomes suggest increase in cointegration relations between Europe and China after the crisis, indicating a more diversified portfolio for investors before the crisis. European and Russian financial time series show no changing in cointegration linkages after the crisis, suggesting scope for diversification gains before and after the crisis in the long run.The dynamic cointegration results, however, demonstrate episodic cointegrating relations over the whole period for the all markets. These findings also clear illustrate growth in cointegration linkages during the first year of the crisis for all samples, suggesting a less diversified portfolio during this period (for the short horizon investors), and supporting the financial contagion effect in the short run.Looking at static and dynamic results, we recommend combining both methods in order to make a clear conclusion about benefits from international diversification.