Long-Run Gains From International Equity Diversification: Taiwan's Evidence, 1995-2001

This study attempts to explore whether there exist long-run gains from international equity diversification for Taiwan investors who invest in the stock markets of its major trading partners, namely those of Hong Kong, Japan, Singapore, South Korea, and the United States. We further incorporate two dummies, taking into account two financial shocks of the stock crash of the United States in 1997 (D97) and the Asian financial crisis (DAC), into our model. The results indicate that these six stock markets are cointegrated with one cointegrating vector, which implies that the efficient market hypothesis (EMH) is violated in this multinational stock markets and the Taiwan investors may not benefit from portfolio diversification in the stock markets of its major trading partners. However, the dropping of either Singapore or South Korea markets from the portfolios leads to a rejection of cointegration and hence implies gains from diversification. Our results argue that analysis of more extensive investment portfolios and the drawing of conclusions regarding portfolio diversification must be carried out with great care for Taiwan investors