Potential For Portfolio Diversification Across Eastern European Stock Markets.

This study provides an empirical analysis of portfolio diversification potential of transitional Eastern European and former Soviet Union equity markets. The claim is that although these economies tend to move at the same direction, the return series from these markets are not fully integrated. The existence of far from positive unitary correlations and the absence of cointegration between returns in most markets, indicate that these markets are independent to the extent that there exist profitable opportunities from diversification across them. But as an analysis of the actual patterns of portfolios flows into these countries demonstrates, international investors tend to fail to exploit all benefits. The paper gives some explanations for this phenomenon on the basis of institutional factors, as well as using theories of bias and agglomeration. Some implications for economic policies for «offended» countries are derived, with the goal to improve the effectiveness of their signaling about investment attractiveness.