A Global Portfolio Diversification and Equity Market: Evidence from TradingPartners of Pakistan
Keywords:
The influential work of Markowitz (1952, 1959) provides foundation to modern investment philosophy. Investors can reap the potential benefit of portfolio diversification only if the involved asset classes in investment basket are not perfectly correlated. Objective of this study is to empirically investigate the cointegration among equity market of Pakistan and its major trading partners (China, France, Germany, Hong Kong, Japan, Korea, Malaysia, UK and USA). Sample period of study starts from 2004 to 2015, on weekly basis. Bivariate cointegration (Johansen, 1991, 1995) analysis reveals that equity market of Pakistan has no long term relationship with any of the equity markets of its major trading partners. Therefore, we recommend to potential investors, portfolio managers, and policy makers that prospective benefit of portfolio diversification can be achieved by investing in the equity markets of major trading partners of Pakistan. Further, they should be vigilant regarding the co-movement among equity markets during portfolio management decisions.Abstract
The influential work of Markowitz (1952, 1959) provides the foundation for modern investment philosophy, emphasizing that investors can achieve the benefits of portfolio diversification only when the assets in an investment portfolio are not perfectly correlated. The objective of this study is to empirically investigate cointegration between the equity market of Pakistan and those of its major trading partners, including China, France, Germany, Hong Kong, Japan, Korea, Malaysia, the United Kingdom, and the United States. The study uses weekly data covering the period from 2004 to 2015. Bivariate cointegration analysis, based on the Johansen (1991, 1995) methodology, reveals that Pakistan’s equity market does not exhibit a long-term relationship with the equity markets of its major trading partners. Accordingly, the study recommends that potential investors, portfolio managers, and policymakers can achieve prospective diversification benefits by investing in the equity markets of Pakistan’s major trading partners. Furthermore, they should remain vigilant regarding equity market co-movements when making portfolio management decisions.
