Portfolio diversification is an important issue in the investment process. Country diversification is a way to achieve higher returns with lower risk for international portfolio investment. In this study, I examine possible short and long term relationships between the US and the Turkish equity markets by employing correlation analysis, cointegration methodology and Granger causality. Results indicate that the two markets are not highly correlated and there is no cointegrating relationship, pointing to possible diversification benefits by investing in the Turkish market. However, long term Granger causality results that show influence of the US market on the Turkish market limits the benefits that can be derived from diversification.

Portfolio diversification is an important issue in the investment process. Country diversification is a way to achieve higher returns with lower risk for international portfolio investment. In this study, I examine possible short and long term relationships between the US and the Turkish equity markets by employing correlation analysis, cointegration methodology and Granger causality. Results indicate that the two markets are not highly correlated and there is no cointegrating relationship, pointing to possible diversification benefits by investing in the Turkish market. However, long term Granger causality results that show influence of the US market on the Turkish market limits the benefits that can be derived from diversification.