Driving Factors of Efficiency of CEE Capital Markets

In this paper I investigated the driving factors of integration of emerging capital markets into the global market. First, I analyzed the level of integration/segmentation of selected Central and Eastern European (CEE) countries using the methods of correlation analysis, cointegration, and CAPM. Second, I searched for the reason(s) of substantial variance of the level of integration/segmentation among the countries and throughout the time. I compared two different factors, which both might cause such differences, analyzing the problem from both static and dynamic point of views. I tried to answer the question, whether there is a causal relationship between the fluctuation of the level of integration/segmentation of a particular market within a pre-defined time frame and its economical (and political) performance. Or, alternatively, whether the decisive factor is more static than dynamic: the market size predetermines the level of integration that the country is able to achieve. This paper was initiated by confronting results of three previous studies. Three students of Central European University have analyzed the subject of CEE capital market integration using different methodologies and timeframes and have arrived at different conclusions. Maria Haroutounian (1997) concludes her MA Thesis "Risk Exposure of Transition Equity Markets and their Integration into World Capital Markets" with the statement that all emerging markets (as represented by the Visegrad group) are becoming more and more integrated into world capital portfolio. On the other hand, Tigran Minasian (1998) widened his sample to several CEE countries and compared them on the market-size basis. The final result of his study was that large emerging countries are becoming more integrated into the global market, while small markets are becoming more segmented. The last research, conducted by Miriam Ratkovicová (1998) analyzed the time fluctuation of the level of integration of emerging capital markets and was concluded with the result that the level of a market's integration/segmentation is directly dependent on the country's economic performance. These papers analyzed other aspects of equity markets as well, which are not going to be dealt with here. Conclusively, the aim of this paper was to analyze the results of the above mentioned papers, to update their models and reach a consensus in answering the question of where the equity markets of emerging Europe are going.