Contents
Abstract ........................................................................................................... v
About the Author ........................................................................................... vii
List of Figures................................................................................................. xiii
List of Tables .................................................................................................. xv
1 Introduction .............................................................................................. 1
1.1 Context of Study ............................................................................... 1
1.2 Scope of Study .................................................................................. 2
1.3 Contribution of Study ....................................................................... 4
1.4 Definition of Key Terms ................................................................... 6
1.4.1 Definition of European Transition Economies ..................... 6
1.4.2 Definition of European Union Membership ......................... 7
1.4.3 Definition of Effects on Equity Markets .............................. 8
1.5 Structure of Study ............................................................................. 9
2 Literature Review .................................................................................... 11
2.1 Performance Characteristics of Emerging Markets .......................... 11
2.1.1 Return and Volatility Characteristics .................................... 12
2.1.2 Co-movement Between Emerging Markets
and World Markets ................................................................ 13
2.2 Market Integration ............................................................................ 15
2.2.1 Distinguishing Between Market Integration
and Market Liberalisation ..................................................... 16
2.2.2 Theory of Market Integration ............................................... 16
2.2.3 Empirical Market Integration Research ................................ 19
2.3 Regional Market Integration ............................................................. 24
2.3.1 Welfare Effects of Regional Market Integration................... 25
2.3.2 Market Integration Effects of the EU Enlargement .............. 26
2.4 Market Integration and Corporate Governance ................................ 27

2.4.1 Theoretical Link Between Corporate Governance
and Asset Pricing .................................................................. 27
2.4.2 Empirical Evidence Linking Governance
and Asset Pricing .................................................................. 28
2.5 Concluding Remarks on Literature Review ..................................... 29
3 Definition of Research Questions and Hypotheses ............................... 31
3.1 EU Accession and Equity Market Integration .................................. 32
3.1.1 Impact of EU Accession on Level of Co-movement............ 34
3.1.2 Impact of EU Accession on Influence
by Macroeconomic Factors ................................................... 34
3.2 EU Accession and Equity Market Performance ............................... 36
3.2.1 Impact of EU Accession on Equity Market Volatility .......... 37
3.2.2 Impact of EU Accession on Equity Market Returns ............ 40
3.3 Concluding Remarks on Research Questions and Hypotheses ........ 43
4 Methodology ............................................................................................. 45
4.1 Impact of EU Accession on Level of Integration ............................. 45
4.1.1 Co-movement of Equity Market Returns ............................. 46
4.1.2 Influence of Global and Local Macroeconomic
Factors ................................................................................... 49
4.2 Impact of EU Accession on Performance ........................................ 55
4.2.1 Impact of EU Accession on Equity Market Volatility .......... 55
4.2.2 Impact of EU Accession on Equity Market Return.............. 57
4.3 Concluding Remarks on Methodology ............................................. 60
5 Review of Empirical Data ....................................................................... 61
5.1 Review of Qualitative Information and Data .................................... 61
5.1.1 Liberalisation of Eastern European Financial
Markets ................................................................................. 62
5.1.2 Initiation of Equity Trading in European
Transition Economies ........................................................... 63
5.1.3 EU Accession Process of Eastern
European Economies ............................................................ 64
5.2 Review of Quantitative Data Samples .............................................. 68
5.2.1 Market Return Data for European
Transition Economies ........................................................... 68
5.2.2 Return Data on Global and European Indices ...................... 85
5.2.3 Data on Global and Local Macroeconomic Factors ............. 86
5.2.4 Deposit Rates for Calculation
of Risk-Adjusted Return Measure ........................................ 92
5.3 Concluding Remarks on Empirical Data Review ............................. 93

6 Findings and Discussion .......................................................................... 95
6.1 Findings on Impact of EU Accession on Equity
Market Integration ............................................................................ 95
6.1.1 Findings on Change in Co-movement Between
Local and Global Indices ...................................................... 95
6.1.2 Findings on Change in Level of Influence
of Macroeconomic Factors ................................................... 106
6.2 Findings on Impact of EU Accession on Equity
Market Performance ......................................................................... 128
6.2.1 Findings on Impact of EU Accession
on Equity Market Volatility .................................................. 128
6.2.2 Findings on Impact of EU Accession
on Return Levels ................................................................... 135
6.3 Concluding Remarks on Findings and Discussion ........................... 143
7 Conclusions ............................................................................................... 145
7.1 Interpretation of Results ................................................................... 146
7.1.1 EU Accession and Level of Co-movement
of Equity Returns .................................................................. 146
7.1.2 EU Accession and Influence
of Macroeconomic Factors on Equity Returns ..................... 148
7.1.3 EU Accession and Equity Market
Volatility and Return ............................................................. 152
7.2 Limitations of Study ......................................................................... 153
7.2.1 Limitations Related to Data Samples ................................... 153
7.2.2 Limitations Related to Research Methodology .................... 154
7.3 Contributions and Implications of Research .................................... 155
7.3.1 Contribution to Academia ..................................................... 155
7.3.2 Contribution to Practice ........................................................ 156
7.4 Further Research ............................................................................... 157
7.5 Concluding Remarks......................................................................... 158
References ....................................................................................................... 159
Appendix ......................................................................................................... 165
Appendix 1 Index Constituents by Market as of End of Year 2005 ...... 165
Appendix 2 Detailed Sovereign Credit Rating Data .............................. 171
Appendix 3 Exchange Rates Applied in the Analysis ............................ 173
Appendix 4 Rolling 26-Week Correlation Coefficients of Global
and Local Equity Market Indices ........................................ 176
Appendix 5 List of Abbreviations Applied in Text ................................ 184
Appendix 6 List of Variable Acronyms .................................................. 185

List of Figures
Figure 1.1 Delimitations of study ............................................................... 3
Figure 1.2 Recent and potential EU candidates.......................................... 5
Figure 3.1 Average long-term sovereign credit ratings
for the eight European transition economies,
January 1996–July 2006 ............................................................ 39
Figure 3.2 Overview of research area ......................................................... 43
Figure 5.1 Histogram of Slovenian weekly market returns prior
to accession announcement based on local currencies ............. 82
Figure 5.2 Closing values of MSCI World and selected FTSE indices ..... 85
Figure 5.3 Average deposit rates for Hungary, Poland
and the Czech Republic ............................................................. 92
Figure 5.4 Average deposit rates for Lithuania, Latvia and Estonia .......... 92
Figure 5.5 Average deposit rates for Slovenia and the Slovak
Republic ..................................................................................... 92
Figure 6.1 Mean correlation coefficient between the MSCI World
and the local equity market indices ........................................... 102
Figure 6.2 Mean correlation coefficient between the FTSEurofirst
300 Eurozone and the local equity market indices ................... 102
Figure 6.3 Mean correlation coefficient between the FTSE
EuroMid Eurozone and the local equity market indices ........... 102
Figure 6.4 Rolling 26-week standard deviation of equity market
returns in Poland, Hungary and the Czech Republic ................ 129
Figure 6.5 Rolling 26-week standard deviation of equity
index returns in Lithuania, Latvia and Estonia ......................... 130
Figure 6.6 Rolling 26-week standard deviation of equity
index returns in Slovenia and the Slovak Republic .................. 130
Figure 6.7 Polish equity index – weekly closing values indexed
to 100 as of January 1996 ......................................................... 135
Figure 6.8 Hungarian equity index – weekly closing values
indexed to 100 as of January 1996 ............................................ 135

Figure 6.9 Czech equity index – weekly closing values
indexed to 100 as of January 1996 ............................................ 136
Figure 6.10 Lithuanian equity index – weekly closing values
indexed to 100 as of January 2000 ............................................ 136
Figure 6.11 Latvian equity index – weekly closing values
indexed to 100 as of January 2000 ............................................ 136
Figure 6.12 Estonian equity index – weekly closing values
indexed to 100 as of June 1996 ................................................. 136
Figure 6.13 Slovenian equity index – weekly closing values
indexed to 100 as of January 1996 ............................................ 137
Figure 6.14 Slovak equity index – weekly closing values
indexed to 100 as of January 1996 ............................................ 137

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