Volatility and Correlations for Stock Markets in the Emerging Economies of Central and Eastern Europe: Implications for European Investors

This paper examines the implications for European investors of the recent EU expansion to encompass former Eastern block economies. What were the risk and return characteristics of these markets pre- and post-EU? What are the implications for investors within the Euro zone? Should investors diversify outside the CEE? The former Eastern block economies constitute emerging markets which typically offer attractive risk adjusted returns for international investors. In this paper, we explore a number of aspects of this important issue and their implications for CEE based investors culminating in a Markowitz efficient frontier analysis of these markets pre- and post-EU expansion. The results suggest the ‘advanced emerging’ markets of Poland, Hungary, and Czech Republic are less attractive post-EU to a portfolio based investor seeking diversification benefits than the ‘other emerging markets.’