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Cointegration, causality and domestic portfolio diversification in the Cyprus Stock Exchange

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Author Info

  • Eleni Constantinou

    (Department of Accounting and Finance, The Philips College, 4-6 Lamias Street, CY-2100, Nicosia,)

  • Avo Kazandjian

    (Department of Business Studies, The Philips College, 4-6 Lamias Street, CY-2100, Nicosia, Cyprus.)

  • George Kouretas

    ()
    (Department of Economics, University of Crete, Greece)

  • Vera Tahmazian

    (Department of Business Studies, The Philips College, 4-6 Lamias Street, CY-2100, Nicosia, Cyprus.)

Abstract

In this paper we provide an investigation on the potential benefits that may exist for portfolio managers, private and institutional investors from domestic portfolio diversification. We employ daily data for the period 1996-2002 from the Cyprus Stock Exchange, recently established emerging market. Cointegration as well as linear and nonlinear causality analysis is used in order to reveal whether there are benefits from domestic portfolio diversification. The cointegration analysis leads to the conclusion that we are unable to reject the null hypothesis of no cointegration in most bivariate cases of the 56 pairs of sectoral indices and this finding is taken to imply that the are benefits from portfolio diversification, when domestic investors construct portfolios which include stocks from the sectors which are not cointegrated. Furthermore, the application of linear and nonlinear Granger causality leads to a pattern of causality between these pairs of sectoral indices which is almost identical and therefore the linearity hypothesis is rejected. Furthermore, based on our causality analysis we provide evidence that traders and investors in the CSE set up short-run investment strategies. Moreover, this implies that the Cypriot investors do not adopt contrarian and momentum investment strategies. Therefore, we argue that the investors in the Cyprus stock market exhibit myopic investment behaviour.

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Bibliographic Info

Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0522.

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Length: 32 pages
Date of creation: 00 Nov 2005
Date of revision:
Handle: RePEc:crt:wpaper:0522

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Keywords: cointegration; Granger causality; nonlinear causality; domestic portfolio;

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Cited by:
  1. Singh, Priyanka & Kumar, Brajesh & Pandey, Ajay, 2010. "Price and volatility spillovers across North American, European and Asian stock markets," International Review of Financial Analysis, Elsevier, vol. 19(1), pages 55-64, January.
  2. Ahmed, Walid M.A., 2011. "Comovements and Causality of Sector Price Indices: Evidence from the Egyptian Stock Exchange," MPRA Paper 28127, University Library of Munich, Germany.
  3. Walid M.A. Ahmed, 2012. "On the interdependence structure of market sector indices: the case of Qatar Exchange," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(4), pages 468-488.

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