Abstract
Monetary authorities use monetary policy to achieve their objectives. Keeping inflation stable, at low levels is the main objective of central banks. While central banks use monetary policy to control inflation, its decisions also impact the overall economy and financial market. The aim of this paper is to investigate the diversification opportunities in 17 developed and emerging market economies that have implemented inflation targeting. By using Johansson cointegration and Gregory Hanssen tests we investigate the existence of long run co integration relationship between different markets. Moreover, we investigate the short run diversification opportunities by analyzing the short run exposure of each stock index to the S&P 1200 Global Index. The results of our study suggest that stock markets of Brazil and Czech Republic offer very good diversification opportunities, while the Colombian stock market offers very limited diversification opportunities as Colombia stock index has co integration relationship with almost other indices. 
 
 JEL: G15, G11
 
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Highlights
Starting from 1990s, most of the countries in the world started following a liberal policy regarding financial markets, increasing the capital flows between countries
We aim to investigate diversification opportunities between stock markets of emerging markets economies, that have high inflation and stock returns of all other countries under study
In this article we investigate the diversification opportunities between 17 developed and emerging market economies that have implemented inflation targeting regime
Summary
Starting from 1990s, most of the countries in the world started following a liberal policy regarding financial markets, increasing the capital flows between countries. Following such a policy made the markets of each country accessible by the investors worldwide increasing the integration of financial markets. We aim to investigate diversification opportunities between stock markets of emerging markets economies, that have high inflation and stock returns of all other countries under study. At the end we proceed with a simple version of CAPM model to investigate short run diversification opportunities
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