| Abstract: | This paper investigates the temporal stability of various dimensions of the returns of 16 European stock markets that are relevant to an analysis of international portfolio diversification. The basic data consist of daily stock market price indices for these markets. This group of indices comprehends a wide range of stock markets differentiated by size, age and technological sophistication, but in each case located in Western Europe. Two main tests were conducted: (a) ANOVA to identify inter-temporal variability and inter-market variability over 24 three-month sub-periods from January 1989 to December 1994, and (b) cluster analysis to identify groups of markets that exhibit similar behaviour patterns. The findings suggest that, while the potential gains from an internationally diversified portfolio restricted to the equities of Western European markets appear to be substantial, the lack of inter-temporal stability in the composition of the optimal portfolio from one period to another makes these gains difficult to achieve in practice. |
