Are there still portfolio diversification benefits in Eastern Europe? Aggregate versus sectoral stock market data
Journal
The Manchester School
Date Issued
December 2011
Author(s)
DOI
10.1111/j.1467-9957.2011.02229.x
Abstract
The advent of the European Union has decreased the diversification benefits available from
country based equity market indices in the region. This paper measures the increase in stock
integration between the three largest new EU members (Hungary, the Czech Republic and
Poland who joined in May 2004) and the Euro-zone. We allow for a potentially gradual
change in correlation between stock markets, which seems particularly appropriate to
analyse the increasing integration between the Eastern European and the Euro-zone
stock markets over the recent years. At the country market index level all three Eastern
European markets show a considerable increase in correlations in 2006. At the industry level
the dates and transition periods for the correlations differ, and the correlations are lower
although also increasing. The results show that sectoral indices in Eastern European markets
may provide larger diversification opportunities than the aggregate market.
country based equity market indices in the region. This paper measures the increase in stock
integration between the three largest new EU members (Hungary, the Czech Republic and
Poland who joined in May 2004) and the Euro-zone. We allow for a potentially gradual
change in correlation between stock markets, which seems particularly appropriate to
analyse the increasing integration between the Eastern European and the Euro-zone
stock markets over the recent years. At the country market index level all three Eastern
European markets show a considerable increase in correlations in 2006. At the industry level
the dates and transition periods for the correlations differ, and the correlations are lower
although also increasing. The results show that sectoral indices in Eastern European markets
may provide larger diversification opportunities than the aggregate market.
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