Abstract
Although the euro adoption in Estonia in 2011 and changing the trading and clearing currency at the NASDAQ OMX Vilnius for euro on 22 November 2010 were foreseen as a possibility to attract more foreign investors, last year the Baltic stock exchange underwent some extreme fluctuations, both positive and negative.In this paper, shown are statistically significant euro adoption-caused trend breaks underlying the data set of NASDAQ OMX stock exchanges in Tallinn and Vilnius. Also, the possible factors that may have been driving them are discussed. The assessment is carried out using three different structural break tests.
Highlights
The greater attractiveness of local financial markets is supposed to be one of the most obvious advantages of the euro adoption
The others mark the dates of the financial market response to negative shocks.the euro adoption in Estonia and changing the trading and clearing currency to euro in Lithuania had no statistically significant influence on the trading volume and index value dynamics on the local stock exchanges, e.g., on attracting more foreign investors to the financial market or encouraging the actual ones to increase their investment in the Baltics
The Chow test, which was used to investigate parameter stability in the period between 4 January 2010 and 18 July 2011, delivered no statistically significant evidence for rejecting the null hypothesis either for the Tallinn or for the Vilnius stock exchange data. This test prompted to come to the conclusion that the euro adoption and changing the trading currency to euro had no statistically significant impact on attracting new investors to the NASDAQ OMX Baltic stock exchange
Summary
The greater attractiveness of local financial markets is supposed to be one of the most obvious advantages of the euro adoption. The consequences of these events are possibly long-term but outweighed by the global macroeconomic situation. This encouraged me to challenge the hypothesis that the adoption of euro as the trading currency had a statistically significant impact on the trading volume at the NASDAQ OMX stock exchanges in Tallinn and Vilnius, e.g., on attracting investments into the Baltic financial markets. The effect of the euro as a trading currency on foreign investors’ attitude towards the Baltic financial markets is assessed by invoking the structural break definition which describes it as a statistically significant alteration in the mean value, a slope of trend or both (Perron, 1989; Enders, 2004). The paper contains a literature review which covers some related studies and their inferences used to define the frame of the paper, methodological framework, three other parts dedicated to each of the tests, and conclusions
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