ABSTRACT
International asset pricing and portfolio diversification have reached increasing attention in the empirical research of finance. This is because most of the national capital markets have experienced rapid deregulation and integration in recent years. This development has enhanced the efficiency in the international allocation of capital. Numerous studies have investigated relationships between the average returns of different stock markets. In an early paper, Makridakis and Wheelwright (1974) investigated the short-term stability of the relationships between 14 stock market indices and reported that the co-movements of international stock exchanges seem to be random processes. Similar conclusions have been drawn by Hilliard (1979). However, most studies provide results suggesting a higher level of stability and stronger co-movements of international stock markets (see, for example, Ibbotson et al., 1982; Philippatos et al., 1989; von Furstenberg and Jeon, 1989; Meric and Meric, 1989; Grinold et al., 1989; Jeon and von Furstenberg, 1990; Malkamäki et al., 1991).
