THE DIMINISHING BENEFIT OF GLOBAL PORTFOLIO DIVERSIFICATION

In this paper, we study the impact of the September 11, 2001 terrorist attacks in the U.S. and the ensuing war against terrorism during the post-September-11 period on the co-movements of the U.S., Japanese, Australian, U.K., and German stock markets. Our rolling correlation analysis results indicate that correlation between the U.S. stock market and the world's other major stock markets increased substantially, and therefore, the benefit of global portfolio diversification to U.S. investors with these markets decreased considerably after September 11, 2001. Our Granger causality test results indicate that there is a closer linkage between the U.S. stock market and the world's other major stock markets in the post-September-11 period than in the pre-September-11 period.