This paper investigates the existence of cointegration and causality between the stock market price indices of Thailand and its major trading partners using monthly data (1987-2005). The Engle-Granger two-step procedure and Gregory and Hansen (1996) test (allowing for one structural break) provide no evidence of a long-run relationship between the stock prices of Thailand and these countries. We argue that there exist potential long-run benefits from diversifying the investment portfolios internationally to reduce the associated systematic risks across countries. However, in the short run there are three unidirectional Granger causalities running from the stock returns of Hong Kong, the Philippines and the UK to that of Thailand. Furthermore, there are two unidirectional causalities running from the stock returns of Thailand to those of Indonesia and the US. Bidirectional Granger causality test results suggest that the stock returns of Thailand and three of its neighbouring countries are interrelated.
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