ANALYSIS OF THE CROSS-COUNTRY PREDICTABILITY VIA THE STUDY OF COINTEGRATION: THE CASE OF SIX ASIAN EMERGING MARKETS

The aim of this paper is to investigate the stock returns predictability in a multi-variate context. Johansen’s multivariate cointegration analysis is applied to weekly data on the Korea, Hong Kong, Taiwan, Indonesia and Singapore indices in 1997-2008. The results indicate that markets are cointegrated when prices are expressed in local currencies whereas no cointegration was found for prices in terms of Euro. This result implies the impossibility to diversify internationally in these markets when the index prices where expressed in local currencies. In both case, there is significant cross-country predictability, i.e. the forecast of future returns on one market can be improved by including past returns from other markets.