The purpose of this paper is to investigate the relationships between stock market returns
of 13 countries based upon monthly data spanning December 1987 to April 2007.
Design/methodology/approach - Specifically, the principal component (PC) and maximum
likelihood (ML) methods are used to examine any discernable patterns of stock market co-movements.
Findings - Factor analysis provides evidence that stock returns in a number of Asian countries are
highly correlated and, based on the resulting robust factor loadings, they form the first well-defined
common factor. The paper also finds consistent results (based on both the PC and ML methods)
suggesting that the stock market returns of developed countries are also highly correlated, and
constitute our second factor. The paper concludes that, inter alia, geographical proximity and the level
of economic development do matter when it comes to co-movements of stock returns and that this has
important implications for financial portfolio diversification if the aim is to reduce systematic risks
across countries. Very few previous studies have investigated the benefits from portfolio
diversification by using the PC and ML methods.