Claire G. Gilmore

International portfolio diversification: US and Central European equity markets

Abstract This paper examines the short- and long-term relationships between the US stock market and three Central European markets. Low short-term correlations between these markets and the US are found. Application of the Johansen cointegration procedure indicates that there is no long-term relationship. The Granger-causality test does reveal a causality running from the Hungarian to the Polish market, but none with the US. Overall, the results suggest that US investors can obtain benefits from international diversification into these markets.

The Evolution of Interdependence in World Equity Markets - Evidence from Minimum Spanning Trees

The concept of a minimum spanning tree is used to study the process of market integration for a large group of national stock market indices. We show how the asset tree evolves over time and describe the dynamics of its normalized length, mean occupation layer, and single- and multiple-step linkage survival rates. Over the period studied, 1997–2006, the tree shows a tendency to become more compact. This implies that global equity markets are increasingly interrelated. The consequence for global investors is a potential reduction of the benefits of international portfolio diversification.

Random-Walk and Efficiency Tests of Central European Equity Markets

The existence of weak-form efficiency in the equity markets of the three main Central European transition economies (the Czech Republic, Hungary, and Poland) is examined for the period July 1995 through September 2000, using weekly Investable and Comprehensive indexes developed by the International Finance Corporation. Several different approaches are used. Univariate and multivariate tests provide some evidence that stock prices in these exchanges exhibit a random walk, which would support weak-form efficiency. This differs in some cases from studies using data for the initial years of these markets. The variance ratio test of Lo and MacKinlay (1988) yields somewhat mixed results concerning the random walk properties of the indexes. A model-comparison test compares forecasts from a NAIVE model with ARIMA and GARCH alternatives. Results from the model-comparison approach are consistent in rejecting the random-walk hypothesis for the three Central European equity markets.

An examination of nonlinear dependence in exchange rates, using recent methods from chaos theory

Abstract Interest in the relevance of nonlinear dynamics to finance and economics has spurred the evolution of new ways to analyze time series data. Tests for chaos, based on a metric approach which measures spatial correlations, led to the development of the correlation dimension test for chaos and the BDS test for nonlinearity. More recently, a topological method has been introduced into the scientific literature which employs a simple qualitative test for chaos that is adaptable to the characteristics of financial data. A quantitative version is also presented here. Conflicting evidence exists about the presence of chaotic behavior in exchange-rate data. The qualitative topological test does not support evidence of a chaotic generating mechanism in these series. The quantitative form finds nonlinear dependence and is a useful diagnostic to determine the adequacy of ARCH-type models for this nonlinear structure.

The Dynamics of Central European Equity Market Integration

This paper examines bilateral and multilateral cointegration properties of the German stock market and those of the three major Central European countries which recently attained membership in the European Union. Cointegration tests cover the time period of July 6, 1995 to February 10, 2005. Additional techniques are also applied to provide further information concerning the dynamic evolution of the integration process during this period. Application of the Johansen (1988) cointegration procedure indicates that, contrary to results for an earlier time period there is evidence of an emerging long-term relationship between the German and UK markets and the Czech market, as well as cointegration within the group of Central European markets. We also apply the Haldane and Hall convergence analysis, in an effort to determine the extent to which these markets are converging to London or Frankfurt. Overall, the results suggest that the process of integration of the Central European countries into the EU is leading to a closer integration of their equity markets with those of major EU countries.

Detecting Linear and Nonlinear Dependence in Stock Returns: New Methods Derived from Chaos Theory

Interest in the relevance of nonlinear dynamics to fields such as finance and economics has spurred the development of new methods of analysis for time series data. Early tests for chaos led to problems when applied to financial and economic data. This motivated development of the BDS family of statistics to test for nonlinearity generally. More recently, another method of analysis has been introduced into the scientific literature. It uses a test for chaos which is relatively simple and appropriate for financial data. A quantitative version of this test is developed here and is used to analyze stock return data.

Comovements in Commodity Markets: A Minimum Spanning Tree Analysis

We examine the interrelationships between a large number of commodity series over a 20 year period through the use of minimum spanning trees. We find that there are several distinct clusters, that these are reasonably stable over time, and that the degree of interlinkage is time varying.

The Evolution of Linkages in European Equity Markets: A Minimum Spanning Tree Analysis

The concept of a minimum spanning tree (MST) is used to study the process of comovements for 21 European Union stock market indices. We show how the asset tree and its related hierarchical tree evolve over time and describe the dynamics. Over the period studied, 1999-2006, the French equity market provides the main linkages in the system. The 2004 Accession states are more loosely connected to the other markets; they form two groupings, with the Czech Republic, Hungary, and Poland having tighter links to the main markets than the remaining accession markets. The consequence for global investors is a potential reduction of the benefits of international portfolio diversification in European markets, with the possible exception of those markets at the outer limits of the MST.