Abstract
Stock markets are considered a barometer of the respective country’s economy around the world. Modern portfolio theory advocates diversification for risk management, which helps maintain returns as long as indices around the world are not perfectly correlated. The relationship exists across markets; as a result, co-movement has drawn the attention of individual investors and portfolio managers for the construction of their portfolios to maximize returns for a given level of risk. The study of co-movements provides inputs for portfolio construction and facilitates the identification of markets where indices may move in the same direction or the opposite direction and the country’s stock markets that are not correlated. A review of the literature revealed that statistical tools like Correlation, Factor analysis, and Granger causality test, etc., are some of the tools that can be used to understand co-movements of markets. Alan harper et al. (2012) study used principle component analysis and inferred that Indian stock returns are aligned with its trading partners and concluded that maximizing the investors’ returns by reducing the risk. Tak Kee Hui concluded that factor analysis provides inputs for selecting foreign markets for risk diversification. This study examines the potential for diversification using 22 world stock market indices using multivariate analysis.
Highlights
This study look at the correlation structure of the eight Asian has been carried out to investigate the potential for countries and compare it with the correlation structure diversification into various stock indices by using the among the European countries
One of the well-known multivariate investigated the co-movements of equity returns for analysis techniques, like factor analysis, has been used indices of four major equity markets, namely Toronto in the study to understand the relationship among the 300 share index, Topix, the financial times stock latent variables
It can be inferred that Sensex has a weak correlation with few indices like Tadawul (Saudi Arabia, Amman SE General (Jordan), BLOM (Lebanon), and MSM (Oman)
Summary
Reva University Abstract- Stock markets are considered a barometer of the respective country’s economy around the world. One of the well-known multivariate investigated the co-movements of equity returns for analysis techniques, like factor analysis, has been used indices of four major equity markets, namely Toronto in the study to understand the relationship among the 300 share index, Topix, the financial times stock latent variables. It obtains a reduced set of uncorrelated exchange 100 shares, and S&P 500 index for a period of latent variables using a set of linear combinations of the. Various tests conducted are: correlations test, KMO test, component matrix test, communalities test, and rotated component matrix test
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