Aspects of Volatility and Correlations in European Emerging Economies

This chapter examines the implications for European investors of the recent European Union (EU) expansion to encompass former Eastern bloc economies. It is questionable whether the formation of the European Monetary Union (EMU) within the EU has increased the correlation of national assets. This clearly has important implications for investors wishing to diversify across national markets, such as the implications of growing asset correlations, if they are displayed, and whether investors should diversify outside the Central and Eastern European (CEE) countries. It could be argued that the former Eastern bloc economies constitute emerging markets which typically offer attractive risk-adjusted returns for international investors. Therefore, this chapter explores a number of important aspects of portfolio selection and investment opportunities and their implications for CEE-based investors, culminating in a Markowitz efficient frontier analysis of these markets pre- and post-EU expansion.