An Empirical Examination of International Diversification Benefits in Central European Emerging Equity Markets‪.‬

ABSTRACT The objective of this paper is to examine the short and long-term relationships between the seven developed equity markets of United-States, Canada, United-Kingdom, France, Germany, Italy, Japan and three Central European emerging equity markets of Czech-Republic, Hungary and Poland in order to study their implications on the potential gains from international diversification in these emerging markets. The shortterm relationships measured by the correlation matrix indicate a lower level of correlation between developed and emerging equity markets of Central Europe. In order to carry out the long-term relationships we resorted to Johansen cointegration techniques recently developed. The tests show that there is no long-term relationship between G7 developed equity markets and Central European emerging equity markets. Theses results indicate that the increase of financial integration degree and co-movement between equity markets has not significantly affected the expected benefits from international diversification in these emerging markets. These gains remain significantly important for the G7 industrial investors in the Central European emerging equity markets.