Dissemination of Price Innovations between the Nordic-Baltic and Advanced Stock Markets

The Nordic countries not only are historically, socially, and culturally connected, but they also share very similar economic characteristics and as a result are deeply economically interrelated. Consequently, Nordic countries can be considered as a bloc where the information is expected to be transmitted efficiently across the domestic stock markets. This efficiency may lead to instantaneous exhaustion of any possible arbitrage opportunities in these stock markets. The objective of this study is first, to determine the correlations among stock markets of the Nordic countries and discover which country is potentially the origin of price innovations and volatilities of return. We, further, attempt to examine empirically the process of the diffusion of information across these stock markets. The results and implications of this study are most valuable, specifically, to asset managers, to establish the optimal structure for their portfolios. This knowledge becomes more vital as the internationalization and integration of European capital markets continues at a rapid speed.

In order to carry out this investigation, we use three econometric models. These models are estimated in framework lead and lag regression, GARCH, and vector autoregression (VAR). We expect that the results provide evidence to indicate that the Nordic stock markets are primarily impacted by the within bloc price innovations and shocks. However, we believe some influence from equity markets outside the bloc, such as Western European countries and the United States should be ruled out.