The instability of intercountry equity returns: implications for efficient portfolios

Abstract

The aim of the paper is to provide insight on the stability attributes of the elements of intercountry equity returns over be 1982-1991 period. In achieving that goal the Bos-Fetherston CUSUM testing procedure was applied to an extension of the work of Han and Park (1989) to create a new multivariate CUSUM test. This innovative procedure was employed to demonstrate that the first two moments of the monthly total returns on a set of twenty-three stock markets are not constant over time. To make certain that instability in these inputs to the calculation of an efficient frontier produces instability in the frontier, aspects of the efficient frontier were also tested for stability. The efficient frontier based on past data was also found to be unstable. This variability creates difficulties for the international investor who uses past data to achieve optimal diversification.