Risk diversification: A cross country cointegration approach

Portfolio managers interested in international diversification systematically study pattern of dependence among world capital markets to increase opportunity set of investment and to maximize benefits from international diversification. It is often argued that Indian capital market is now more integrated with the rest of the world. But the problem with this assumption is the market that belongs to emerging category by definition cannot be well integrated. Findings based on cointegration suggest that Indian capital market still more or less functions independently like other emerging markets. Only about six percent of the variability of Indian capital market can be explained by other sample countries in a horizon of 12 weeks. Weak integration with other markets of the world suggest merit of the slogan for Indian investors “go beyond national boundaries” to enjoy the benefit of international diversification.