International diversification among the capital markets of the EEC

The purpose of this paper is to analyse the economic rationality of international diversification in stock markets. The VAR methodology is used to detect significant interrelations among stock markets, as well as the transmission mechanism of information flows among markets. The results show a high degree of correlation among markets and a similar pattern in the transmission of information, specially among EEC markets. Therefore, international diversification does not allow for the reduction of risk without sacrificing expected profitability. Having said that, it makes more sense to take advantage of information provided by the New York market, which is the leader market and to take stock positions before this information is incorporated into the price of the stock.