Integration of Russian Equity Markets with the World Equity Markets - Effects of the Russian Financial Crisis of 1998

Abstract

Since the breakup of Soviet Union, a market economy has been evolving in the Russian Federation. One of the key components of this emerging market economy is the Russian equity market. Initially foreign investors showed considerable interest in the Russian equity market, but the financial crisis of 1998 considerably altered the foreign investor sentiment towards Russian market. In this paper we look at the integration of the Russian equity market with the world equity markets and investigate the long-term effect of the 1998 financial crisis on this integration process. We use the Russian Trading System (RTS) equity data and Morgan Stanley Capital International (MSCI) world equity index as the proxies for the Russian equity market and world equity markets. We use a simple regression format to test the effect of the financial crisis of 1998 on the overall Russian equity market and also at the individual firm level during the six-year period from September 1995 to August 2001. Results of our analysis indicated that the Russian markets have become less volatile after the financial crisis of 1998. But the financial crisis had statistically significant positive effect on the Russian equity returns. The integration of the Russian equity market with the world equity market increased during the three-year post crisis period. The crisis also had a similar effect on seven of the 23 individual stocks studied.