The long-run gains from international equity diversification: Australian evidence from cointegration tests

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Abstract
The benefits available from international equity diversification to Australian investors for the period 1970–92 are analysed using monthly index data for 16 countries supplied by Morgan Stanley Capital International. The cointegration framework is utilized and results from the standard Engle—Granger two-step ordinary least squares procedure are compared with those from the Johansen (1988) maximum likelihood procedure. It is found that, as in other recent work (Taylor and Tonks, 1989; Andrade, Clare and Thomas, 1991), the two techniques lead to different conclusions in certain cases. It is also found that, as in Kasa (1992), there is evidence of cointegration among a subset of the indices considered. A further finding of interest to the applied worker is that the results in the Johansen procedure are sensitive to the VAR specification and we believe that Hall's (1991) warning regarding the reporting of tests from this procedure is valid.