Swedish Financial Sector Integration with Baltic Stock Markets - A Cointegration Approach

Abstract

This study investigates the long-run relationships and short-run dynamic linkages between the stock exchanges of Baltic countries and Swedish financial sector over the sample period 2000-2011. Johansen method of multivariate cointegration is utilized to determine long-run relationship, while Impulse response functions and Granger causality analyses, based on Error Correction Model (VECM), are employed to estimate the short-run dynamics among variables in the system. The empirical investigations suggest that there is relatively weak long-run relationship between indices of Lithuanian, Latvian, Estonian stock markets and Swedish stock and Swedish financial sector. However, we find some evidence that indicates long-run financial linkages between the performance of some Swedish banks which have high financial exposure in the Baltic countries and Baltic state stock market indices. In the short-run, the impulse response functions and Granger causality analyses indicate that Baltic stock markets have unidirectional effect on Swedish financial sector at immediate day of initial shock. Despite of the fact that the long-run identifications do not support a high long-run financial integration in this region, however, in the short term dynamics provide some evidence of increasing financial integration.