The price linkages between country funds and national stock markets: Evidence from cointegration and causality tests of Germany, Japan and UK Funds

This paper examines the price linkages of three major US-traded country funds (Germany, Japan and the UK) with their own national and the US stock markets. The cointegration tests indicate a generally limited and differential pattern of cointegrating relations for pairs involving country funds as opposed to those involving national market indices. The causality tests reveal that all three country funds have a two-way causality with their own national markets, but only one has a similar causal relation with the US. These findings suggest a potential for long-term portfolio gains by international diversification as well as short-term joint market inefficiency.