Did Baltic stock markets offer diversification benefits during the recent financial turmoil? Novel evidence from a nonparametric causality in quantiles test

Vassilios Babalos, Mehmet Balcilar, Tumisang Loate and Shingie Chisoro
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Tumisang Loate: Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.
Shingie Chisoro: Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.
Authors registered in the RePEc Author Service: Rangan Gupta

No 201471, Working Papers from University of Pretoria, Department of Economics

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 (German, France and U.K) and emerging Baltic markets namely; Estonia, Latvia and Lithuania. Our analysis focuses on the period before and after countries’ EU accession and pre- and posts 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 that runs from all of the major markets to the Baltic markets across both samples. However, the parametric test fails to detect the causal effect from the Baltic markets to most of the major markets in both sample periods. In contrast, the nonparametric Granger Causality test reveals that stock returns in the Baltic markets have significant predictive power for changes in the major stock returns especially during periods of financial turmoil. Policy implications for international investors are also discussed.

Keywords: Baltic stock markets; non parametric; quantile causality; diversification benefits; global financial crisis (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2014-11
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Journal Article: Did Baltic stock markets offer diversification benefits during the recent financial turmoil? Novel evidence from a nonparametric causality-in-quantiles test (2018)
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