Dynamic linkages between Baltic and International stock markets
Abstract: The fact is that high integration between different capital markets leads to reduced international diversification opportunities for investors as well as to a greater transmission of market volatility. This study discusses the behavior of the three Baltic stock markets on the international financial arena and examines how these markets react on different inflows of information and economical shocks. Evidence of cointegration between the Baltic markets is found, using a daily data set. Testing the time series bilaterally, more than one cointegrating relationship is found. Further, causality analysis is performed using both impulse response and variance decomposition approaches. As a result, no dramatic impacts are detected on the Baltic stock markets from the shocks on the international stock markets (US, EMU, Russia, Japan and China). It is also obvious that innovations in the international stock markets fail to explain any substantial part of error variances on Baltic stock markets.
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