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Abstract
International portfolio diversification benefits between US stock markets and corresponding markets in Turkey and Egypt are examined from a short- and long-term perspective. The Johansen cointegration procedure reveals cointegration at the general index level related to some but not all sub-indexes investigated. Granger causality indicates, in general, causality running between USA and Turkey but only isolated cases involving Egypt. Overall, the results suggest that US investors can obtain diversification benefits at a sub-index level given a long-term investment horizon restricted to positions in one but not both Middle Eastern markets in one and the same portfolio. Short-term benefits involve the Egyptian market related to two out of three sub-indexes.
Acknowledgments
The author gratefully acknowledges comments from an anonymous referee on an earlier version of the paper. The usual disclaimer applies.
Notes
Information from the homepage of the Cairo and Alexandria Stock Exchange at www.egyptse.com
Information from the homepage of the Istanbul Stock Exchange at www.ise.org
In this sense, the Johansen test can be seen as a multivariate version of the less powerful Engle and Granger (Citation1987) two-step cointegration procedure.
A more detailed discussion of the Johansen technique can be found in Johansen (Citation1992).
Alternative lag structures were also examined both for the bilateral and multilateral cases. The results are robust against choice of lags with the use of the Akaike Information Criterion (AIC).