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Financial Liberalization and the Changing Characteristics of Nordic Stock Returns

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Abstract

This paper uses a multivariate regime-switching framework to investigate and endogenously date changes in return characteristics on the four largest Nordic stock markets. We find that the deregulated time-period, specifically after 1982, is associated with higher expected return, higher volatility, stronger links with international stock markets and higher correlation between the Nordic stock markets. This higher correlation is mainly driven by common higher correlation with international stock returns and not by higher correlation between country specific components of return. Further, our evidence support the argument that market liberalization creates excess volatility but also that Nordic investors are more than compensated for this by higher expected returns and the opportunity to cross-border diversification after liberalization.

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  • Nilsson, Birger, 2002. "Financial Liberalization and the Changing Characteristics of Nordic Stock Returns," Working Papers 2002:4, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2002_004
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    File URL: http://project.nek.lu.se/publications/workpap/Papers/WP02_4.pdf
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    Cited by:

    1. Batra, Amit, 2004. "Stock return volatility patterns in India," Indian Council for Research on International Economic Relations, New Delhi Working Papers 124, Indian Council for Research on International Economic Relations, New Delhi, India.
    2. Panicos Demetriades & Michaeil Karoglou & Siong Hook Law, 2007. "Financial Liberalisation and Breaks in Stock Market Volatility: Evidence from East Asia," Money Macro and Finance (MMF) Research Group Conference 2006 162, Money Macro and Finance Research Group.
    3. Alexius, Annika, 2004. "Far Out on the Yield Curve," Working Paper Series 2004:12, Uppsala University, Department of Economics.

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    More about this item

    Keywords

    stock market liberalization; excess volatility; portfolio diversification; multivariate regime-switching models; simulated annealing;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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