Robust Approach to Analysis of International Diversification Benefits between US, UK and Emerging Stock Markets

As is known skewness and outliers are frequently observed in return series, overlooking both concepts during the statistical analysis may cause misleading interpretations. In this paper similar movements of stock markets through the returns of developed and emerging stock markets are recognized and appealing portfolio diversification benefits are identified for investors of USA, UK and Turkey. Different from the previous studies, modified robust principal component analysis which considers skewness and outliers effects was used to investigate the best portfolio diversification. Sixteen stock markets are represented with five components according to findings obtained from analysis. Hence Egyptian, Hungarian, Polish, Thai and Indonesian stock markets provide appealing portfolio diversification opportunities for investors of Turkey. And for the investors of USA and UK, selected emerging markets except Mexican and Turkish offer good diversification benefit.