A Comparative Study of International Stock Market of Developed & Developing Countries

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“A Comparative Study Of International Stock Market Of Developed & Developing Countries.”

ABSTRACT

An understanding of the difference in stock price exposures across markets helps to determine equilibrium premium and asset allocation of international portfolio. This paper is based on cross sectional study of various developed and developing countries for the year 2006,2007 and 2008. Eight developed countries viz.USA, UK, Australia, France, Germany, Hongkong, Japan, Singapore and Nine developing countries viz. India, Russia, Brazil, Indonesia, Korea, Malaysia, Taiwan and Mexico. Two way ANOVA has been used for analysis. The results shows that there is no significant difference in market capitalization among developed and developing countries. But the market capitalization of developing and developed countries differ significantly.

“ A Comparative Study Of International Stock Market Of Developed & Developing Countries.”

INTRODUCTION

The interrelationship between international stock markets is a key issue in international portfolio management and risk measurement. The efficient markets hypothesis has been one of the most widely criticized theories in the financial literature in recent years on the basis that investors may exhibit irrational and predictable biases mainly attributed to psychological factors. Trading and active portfolio management involve sophisticated brain functions such as logical reasoning, numerical computation, and short- and long-term planning which may often be tempered by emotional responses such as fear. Investors’ preference for the avoidance of loss may imply that significant fluctuations in prices are not necessarily related to the arrival of information on economic or financial variables but may also correspond to collective phenomena such as crowd effects or herd behavior. Behavioral finance incorporates these approaches into standard models of financial markets to explain the aggregate effects of decisions taken by individual traders. The existence of uncorrelated returns in international stock markets is fundamental in a context of global portfolio diversification. When high stock market volatility occurs, risk control is the main aim of portfolio managers and international diversification is a crucial issue for it. The existence of uncorrelated returns in international stock markets is fundamental in a context of global portfolio diversification. When high stock market volatility occurs, risk control is the main aim of portfolio managers and international diversification is a crucial issue for it.

Portfolio managers, who follow a top-down approach, first look for the best international diversification and then choose the best-performing stocks in the local markets. The common component or cycle decomposition shows that country-specific shocks are by far the most important source of international return variation. In this case international diversification strategies still prove to be effective. Second, our approach provides portfolio managers with information on which stocks to pick within countries. In addition, stocks differ in their exposure to country-specific shocks, not all diversified country portfolios are equal in terms of risk reduction.

REVIEW OF LITERATURE

CHIOU, LEE & LEE (2009) Using returns of 4,916 stocks from 22 developed countries and 15 developing countries, this study examines the relative magnitude of conditional volatility and the international market systematic risk of stock prices in countries at different developmental stages and in various geographical areas.

BLASCO & FERRERUELA (2008) This paper examines the intentional herd behavior of market participants within different international markets (Germany, United Kingdom, United States, Mexico, Japan, Spain and...
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