Abstract

According to modern portfolio theory, there are some benefits from diversifying assets. In the literature, the possibility of this diversification is mostly investigated by analysing the correlation coefficients between the returns of the assets. However, this analysis can only give some ideas about short term decisions. For long term decisions, existence of common stochastic trends should be investigated. In this paper, for the fourteen European Union (EU) members and Turkey, this investigation is made by using the methodology of Johansen (1988) and Johansen and Juselius (1990). Since Turkey is in the negotiation process of EU, this analysis is important. Furthermore, 1996 is an important point in time where a customs union is formed between the EU member countries and Turkey. The paper also analyzes whether this formation had an effect on the number of common trends or not. The results show the existence of common trends and moreover, show that number of these trends increases after the formation of customs union. Therefore, there is no evidence of diversification. 

Key words: Common stochastic trend, co-integration, stock exchange markets, Turkey, EU countries.