Högskolan i Skövde

Using cointegration tests, this paper analyzes the existence of long-run relationships among Baltic stock markets and major international stock markets, including the United States, Japan, Germany, the United Kingdom, and France. Bivariate and multivariate cointegration tests indicate a common trend linking Latvia to European markets. Evidence indicates that the German market dominates this long-run relationship. In general, short-term Granger causality indicates causality running from the European markets to the Baltic markets, as well as among the Baltic states, excepting Latvian and Lithuanian short-term effects on the Estonian market. Overall, the results suggest that international investors can obtain diversification benefits given a long-term investment horizon because of the low degree of integration between the Baltic and international capital markets.

International portfolio diversification benefits between US stock markets and corresponding markets in Turkey and Egypt are examined from a short- and long-term perspective. The Johansen cointegration procedure reveals cointegration at the general index level related to some but not all sub-indexes investigated. Granger causality indicates, in general, causality running between USA and Turkey but only isolated cases involving Egypt. Overall, the results suggest that US investors can obtain diversification benefits at a sub-index level given a long-term investment horizon restricted to positions in one but not both Middle Eastern markets in one and the same portfolio. Short-term benefits involve the Egyptian market related to two out of three sub-indexes.