Financial integration of stock markets in the selected former Yugoslav countries

Abstract

Purpose of the study The purpose of this study was to establish the level of integration between the stock markets of the selected former Yugoslav countries (Bosnia, Croatia, Serbia and Slovenia) and major international markets (Austria, the US, the UK, and Japan) as a way of exploring possible diversification benefits for investors. In particular this study seeks to investigate the cointegration of these capital markets by addressing the following: - the bilateral integration of stock markets in the selected former Yugoslav countries, - the multilateral integration of stock markets in the selected former Yugoslav countries, - the bilateral integration of each stock exchange of the selected former Yugoslav countries with those of the developed world.

Data and methodology The data used in the study covers the time period 03 January 2006 – 20 August 2008 (687 observations). The database consists of daily closing prices for eight financial series: SASX-10 (Sarajevo Stock Exchange), SBI20 (Ljubljana Stock Exchange), CROBEX (Zagreb Stock Exchange), BELEXline (Belgrade Stock Exchange), ATX (Vienna Stock Exchange), S&P 500 (New York Stock Exchange), FTSE 100 (London Stock Exchange), and Nikkei 225 (Tokyo Stock Exchange). Data was retrieved from Bloomberg, data provider. Local currencies were used in order to avoid the impact of foreign exchange on the level of security prices. In the event of stock exchanges being closed on certain dates due to holidays, the price for indices from the last trading day was used. The integration between markets is studied through the analysis of correlation, Granger causality tests and the application of Johansen cointegration analysis.

Findings and conclusions The procedures used in the cointegration analysis offer contradictory results. The application of the Engle-Granger methodology indicates no cointegration between the stock markets of the former Yugoslav countries, while the use of the Johansen procedure suggests the presence of cointegration between Bosnia and Serbia, Bosnia and Slovenia, and Serbia and Slovenia. With the exception of Bosnia, the results of the analysis showed the existence of bilateral cointegrating relationship between developed markets and Croatia, Serbia and Slovenia (much stronger link). Equilibrium relationship could possibly be caused by the growing capital inflows from developed markets into these countries. Moreover, it seems that economic reforms and liberalization efforts undertaken in the case of Slovenia (an EU Member State) have resulted in greater level of integration with stock markets of developed countries.