GLOBAL PORTFOLIO DIVERSIFICATION AND CURRENCY MARKET: A PANEL CO-INTEGRATION BASE EVIDENCE FROM TRADING PARTNERS OF PAKISTAN

The influential work of Harry Markowitz (1952) provides foundation to modern investment thoughts. But, investor can enjoy the benefit of portfolio diversification only if asset classes are not co-integrated. The objective of this study is to analyze the dynamic integration of currencies between major trading partners of Pakistan i.e. China, Germany, Hong Kong, Italy, Japan, Kuwait, Saudi Arabia, UAE, UK, and USA. We employ the Pedroni panel co-integration (1999, 2004) techniques for the data period started from January 1, 2005 to January 31, 2017. We uses daily, weekly and monthly data series for robustness of our findings. Results of panel unit root test (ADF-Fisher Chi Square Choi, ADF-Fisher Choi Z- stat, PP-Fisher Chi Square Choi and PP-Fisher Choi Z- stat) confirms the application of panel co-integration test in our sample countries. This Study employs the seven co-integration tests (Panel v-Statistic, Panel rho-Statistic, Panel PP-Statistic, Panel ADF-Statistic, Group rho-Statistic, Group PPStatistic, Group ADF-Statistic) and finds that there exist panel co-integration among the pairs of currencies between major trading partners of Pakistan. We recommend to portfolio managers that they cannot diversify their portfolio by investing in the currency market of major trading partner of Pakistan.