Investment Diversification : A study on six European Countries

University essay from Umeå universitet/Handelshögskolan vid Umeå universitet (USBE); Umeå universitet/Handelshögskolan vid Umeå universitet (USBE)

Abstract:

"It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket."

                    - Don Quixote (Part I, Book III, Chapter 9) by Miguel de Cervantes Saavedra [1547-1616]

 

 

This research aimed to investigate whether it is possible for investors to diversify their investment and reduce the risk of investment by investing in the selected European countries.  Stock market cointegration and international diversification is a widely accepted topic among the scholars and academics in recent years.  This current study is motivated from the significant amount of interesting studies in this field.

A combination of not perfectly positively correlated instruments gives the investor an opportunity to gain from portfolio diversification.  Similarly, Investors can attain diversification benefit if one country’s stock market is not cointegrated with other country’s stock market. 

Six European countries and a time frame of ten years (January, 2001 to December, 2010) have been taken into consideration for the purpose of this research.  The countries are UK, Denmark, Germany, Spain, Poland, and Czech Republic.  The time period of the study is divided into two sub period to observe the recent crisis effect on these selected countries.

A quantitative approach is adopted in the research.  We used an econometric model for this research which is Johansen and Juselius multivariate cointegration approach.  The evidence from the study suggest that although cointegration exists among the selected countries in some extent, investors can still get some diversification opportunity by investing in the emerging countries (Czech Republic and Poland). 

This study is unique in the sense thatin our research, we wanted to fill the research gap by combining new and old EU member countries with the latest time period of study and also considered the recent crisis effect.

 

This study has a number of implications on portfolio managers, policy makers, and academic scholars.

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