Wavelets analysis of the Baltic equity market: risk and co-movement with the European market

This paper’s objective is to explore equity market risk and co-movements between the Baltic stock markets of Estonia, Latvia and Lithuania and the European stock markets both in time and frequency dimensions. We analyse equity markets returns risk across different time horizons (frequencies). At the same time, we focus on the changes of the market risk and co-movements of the Baltic and the European markets returns in time. The aim of the paper is to find the frequencies and time when volatility and co-movements change. We use monthly data in the period of 2000–2017. The wavelet analysis was employed to segregate the risk and co-movements at different time and different frequencies. Compared to previous studies, a novelty of the paper is the investigation of the markets at each time horizon separately. Our findings are consistent with the findings of other researchers who indicated that the Baltic markets are more integrated with the developed European stock markets during crisis periods. We have found some impact of accession to the EU on co-movements between the Baltic equity markets and the European market. We have discovered that co-movements are greater in low frequencies. From the investment diversification point of view, the effect depends on the investment horizon. Our conclusion is that for the investor with a time horizon of over 1.5 years diversification with the Baltic markets is not very efficient