Financial Liberalization and the Changing Characteristics of Nordic Stock Market Returns

Working Paper 2002:1, Department of Economics, Lund University. [Download paper] [Back]

Abstract: This paper uses a multivariate regime-switching model to investigate and endogenously date changes in return characteristics of the four largest Nordic stock markets, Sweden, Finland, Denmark and Norway. 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 however not driven by higher correlation between country specific components of return but instead by the common higher correlation with international stock returns. Further, our evidence support the argument that market liberalization create excess volatility but we argue that Nordic investors are more than compensated for this by higher expected returns and the opportunity to cross-border diversification after liberalization.

Keywords: stock market liberalization; excess volatility, portfolio diversification; multivariate regime-switching models; simulated annealing.