Due to globalization, portfolio managers are increasingly seeking investment opportunities on an international basis by evaluating the risk and return potential as well as the correlation of returns of various foreign securities for the purpose of increasing returns and decreasing portfolio risk. As the economies of former Soviet Bloc countries, defined in this paper as “transition economies”, have transitioned to market economies, they have developed capital markets similar to developed countries. The purpose of this paper is to examine whether stock returns of transition economies such as
II. Review of Literature
There have been numerous studies which have examined the relationship between industrial production and trade among transition economies as well as between developed economies in an attempt to explain stock return behavior (Samitas and Kenourgious, 2007; Gelos and Sahay, 2000; Bekaert, Hodrick, and Zhang, 2008), the relationships among transition economies and developed economies (Chukwuogor , 2008; Claessens, Djankov, and Klingebiel, 2000; Savva and Aslanidis, 2007; and Scheicher, 2001; Tse, Chunchi, and Young, 2003), and the diversification potential of international portfolios (Butler and Joaquin, 2002; Persson and Riksbank, 2002; Pfau, 2008). However, the results of previous studies have been limited by the number of transition economies analyzed as well as by the length of the time horizons examined. This study will use a more complete list of transition countries as well as a longer time horizon.
III. Data and Methodology
The stock index data for this paper will be collected from the Thomson Reuters Worldscope database where available for an original set of twenty-six transition economies which were formerly associated with the Union of Soviet Socialist Republics (Soviet Union). Where stock index data are not available from Thomson Reuters Worldscope database, data will also obtained from other sources, including the individual transition country stock. Changes in the behavior of these returns over time and for subsets of the overall time period will be examined in order to observe stock return behavior during the evolution of the various transition economies in the globalization process. Additionally, the before-membership and after-membership stock return behavior among the eight transition economies which became European Union members on May 1, 2004 will be examined.[1]
IV. Expected Results and Conclulsions
Stock index returns as well as risks of the returns for transition countries are expected to be higher when compared to the returns and risks of an equally weighted portfolio of stock index the five developed countries. However, it is expected that for later sample time periods, the return and risk differences will decrease along with associated increases in the correlations of returns of transition economies and developed countries.