Abstract
Motivated by financial liberalization investors seek for new investment opportunities through international portfolio diversification. To this end we explore any asymmetric causal relationship between developed European stock markets (Germany, France and UK) and emerging Baltic markets namely; Estonia, Latvia and Lithuania. Our analysis focuses on the period before and after countries’ EU accession and pre- and post the global financial crisis. For this purpose, both the standard parametric test for causality and a novel nonparametric test for causality-in-quantiles are employed. The results of both the parametric and nonparametric Granger causality test support a causal relationship in mean that runs from all of the major markets to the Baltic markets across both samples. The results imply the existence of significant nonlinear return and volatility spillover from European markets to Baltic markets. Policy implications for international investors are also discussed.
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Notes
The SIC criterion is known to select a parsimonious number of lags and, thereby, prevents overparameterization problems associated with nonparametric approaches. In this case, however, the sequential modified Likelihood Ratio test, Final Prediction Error (FPE), Akaike Information Criterion (AIC) and the Hannan-Quinn Information Criterion (HQC) all chose a lag-length of one as well.
Which are available from the authors upon request.
The data description is sensitive to the sub-samples selection. There is an increase in correlation during the global financial crisis period (12/2007—06/2009) and then a reduction post the global financial crisis (07/2009—07/2014). The mean for the global crisis period are all negative and then increases post the crisis.
The results are not sensitive when the data is sub-sampled into the pre (02/2001–11/2007), during (12/2007–06/2009) and post (07/2009–07/2014) crisis. We still find that the Baltic markets have no causal effect on the major markets except on the UK market during the crisis period.
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Babalos, V., Balcilar, M., Loate, T.B. et al. Did Baltic stock markets offer diversification benefits during the recent financial turmoil? Novel evidence from a nonparametric causality-in-quantiles test. Empirica 45, 29–47 (2018). https://doi.org/10.1007/s10663-016-9344-4
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DOI: https://doi.org/10.1007/s10663-016-9344-4