This paper examines the implications for European investors of the recent European Union (EU) expansion to encompass former Eastern bloc economies. Cappiello et al (2006) question whether the formation of 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. What are the implications for growing asset correlations, if they are displayed? Should investors 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. 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.
On 1st May 2004 the EU welcomed ten and on 1st January 2007 a further two more countries as part of its largest enlargement ever. The countries concerned are: Bulgaria, Czech Republic, Cyprus, Estonia, Hungry, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia. In this paper we investigate the interactions between the CEE bloc countries and apply time-series analysis to examine the relationship between stock market index return volatility. This includes a discussion of the volatility process of stock market indices as well as their correlations for the purpose of modelling volatility in these markets and assessing the implications for investors.
Many economists have argued that fiscal policy is not effective for stabilization purposes. However, fiscal policy can be effectively used for stabilization under some circumstances. An example is monetary union such as the European Union where stabilizing monetary policy is not available for regional shocks. In order to properly use active fiscal policy rules under these circumstances, it is important to obtain accurate welfare implications of fiscal policies.
This paper defines a notion of an equilibrium and a pseudo-equilibrium for infinite horizon economies with incomplete asset markets. This definition generalizes the usual ones for finite horizon economies with incomplete markets and for infinite horizon economies with complete markets. We establish the existence of a pseudo-equilibrium when assets are short-lived and denominated in general commodity bundles; we obtain a true equilibrium when assets are denominated solely in a single numeraire commodity, or in units of account. It seems to us that the notion of an equilibrium we define is a natural and compelling one; as evidence, we show that our notion actually coincides with several other apparently quite distinct notions of an equilibrium.
The crucial issue that divides the infinite horizon setting from the finite horizon setting is the nature of debt constraints. In the finite horizon setting the constraint that there be no debt following the terminal date, together with the budget constraint, imply limits on debt at earlier dates. In the infinite horizon setting these terminal debt constraints and the implied debt constraints at earlier dates are absent If no additional debt constraints were imposed, then an equilibrium could not possibly exist: all traders would attempt to finance unbounded levels ot consumption by unbounded levels of borrowing. When markets are complete, such Ponzi schemes may be ruled out by the simple requirement that debt at each date/event never exceeds the current value of future endowments; this is frequently called a solvency requirement.
