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Financial and Monetary Integration in the New Europe

Convergence Between the EU and Central and Eastern Europe

Edited by David G. Dickinson and Andrew W. Mullineux

Potential new entrants to the European Union from Central and Eastern European countries face many challenges to achieve financial convergence with the existing EU nations. Using detailed case studies from Bulgaria, the Czech Republic, Latvia, Lithuania and Poland and analysis of cross country data from these regions, Financial and Monetary Integration in the New Europe looks at the key issues for applicant countries as they negotiate the terms of their membership in the European Union. Of major concern to these countries is the financial sector and its implications for economic growth and the conduct of macroeconomic policy. The book examines, in particular, monetary and exchange rate policies, banking regulation and financial market efficiency. The overall impact of building a market driven financial system on economic development is also explored.
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Chapter 17: Market efficiency in transition economies: equity markets and EU accession

Convergence Between the EU and Central and Eastern Europe

Nicholas Horsewood and Douglas Sutherland


Nicholas Horsewood and Douglas Sutherland* It is largely an issue of financial contagion. The real economic links between east Europe and Russia are much less than before, but investor sentiment generally has been hit. . . . We have seen stock markets falling across the region, bond yields edging up and currencies weakening. (Philip Poole, Chief Economist for European Emerging Markets at ING Barings, Financial Times, 29 May 1998) INTRODUCTION Over the last decade a considerable amount of research has focused on the efficiency of financial markets, with the majority of studies concerning bilateral exchange rate data from advanced countries.1 Given the recent behaviour of the Russian stock market, which has declined more than 70 per cent during the last half year and underlies the sentiment expressed in the above quotation, it is of interest to examine the time-series patterns of equity indices from the main Central and Eastern European (CEE) economies to ascertain how much information can be gleaned from them. Despite the growth of analysis into the efficiency of financial markets, there has been relatively little research into the behaviour of the newly created stock markets in CEE economies. This chapter provides an investigation into the long-run relationships between four stock market indices from CEE economies and between the FT 100 index, taken to be the leading European market index and a key measure of investorsÕ sentiment in advanced countries. Comparisons can be made between their longterm trends which, under certain assumptions, have important implications for the efficiency of these markets....

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