Is the case for international diversification still intact? Some evidence from return gaps and correlations

Abstract

The recent global financial crisis once again emphasized the importance of understanding the nature and degree of co-movement between stock markets and how it impacts on global diversification possibilities. This study investigates diversification possibilities from the perspective of South African investors, using weekly stock market returns both in local and US currency to calculate correlation coefficients and return gaps. The sample includes developed markets as well as emerging markets. Given the similarities between South African and developed stock markets, diversification benefits mostly arise within the emerging markets, particularly the Brazil, Russia, India, China (BRIC) countries. Key words: Stock markets, correlations, diversification.