Baltic Stock Exchanges Research Articles

Development, Implementation and Evaluation of Multistage Investment Strategies

Construction of optimal investment portfolio is very complicated task due to many diverse factors which might affect risk and return of the portfolio in the future. Values and impact level of unique factors on the portfolio are changing over time; therefore every investor should take into account the fact that there always will be a certain level of risk associated with any portfolio involving stocks. There is a number of ways to form a collection of most appropriate stocks and bonds for investment portfolio as well as to allocate weights of assets based on various criteria. All of these methods, dedicated for selection and allocation of assets, have their specific features and some disadvantages. In order to be able to conclude which of the asset selection methods have least disadvantages, four popular techniques were analysed and compared. These techniques were based on different variables: correlation coefficients between asset returns, maximisation of the utility function (diverse values of risk aversion coefficients were analysed), selection of assets with highest historical returns, and employment of modified price-to-earnings ratio. The article deals with multistage extension to the mean-variance and expected utility maximisation portfolio choice. Multistage investing consists of several essential stages, where each stage forms a basis for the next stage by providing useful input data, derived by stage-specific analysis. For construction of optimal portfolio the following stages are used: asset allocation, security selection, investment strategy development, construction of the model and its evaluation. After asset allocation was made and stocks for the portfolios had been selected, different theoretical asset allocation models (equal weight asset allocation, Markowitz model, Capital Asset Pricing Model (CAPM), model where risk free asset is incorporated when constructing a portfolio) have been modified and adapted in order to become suitable for real market situation. Such prerequisites as normal distribution of stock returns were not satisfied by most Lithuanian companies’ stocks when different interims were investigated, therefore authors set a presupposition that distribution properties of the stocks can be disregarded when Markowitz and CAPM models were applied to real market. Some other changes for the prerequisites of models were made; otherwise these theoretical models could not have been applied to Lithuanian market. After all models had been applied in Lithuanian equity market, back testing was carried out and certain characteristics of outcomes of different investment strategies were compared. Results were judged against characteristics of popular stock exchange indices of Baltic States in order to obtain conclusions. Most models were developed for broad financials markets (global markets). In the paper we analyse financial market of Lithuania. Since this market does not fit assumed conditions of general models, the models were slightly modified to apply for Lithuania market. The results of portfolio were compared with Baltic States index. It was concluded that the highest return rate is achieved by constructing the investment portfolio with employing modified Capital Asset Pricing Model. The best technique for selecting stocks proved to be the maximisation of utility function when risk aversion coefficient A=3. In addition to this, after comparison of different asset selection methods, it was noted that the highest value of the Sharpe ratio was achieved by utilising the same technique. After investigation it was noted that investors should add a risk free asset into portfolio of stocks because it usually improves the results of most portfolios, irrespective of their contents. Constructing portfolios based on asset allocation according to indices analysed in the paper is not recommended because characteristics of indices were worse than the ones of constructed portfolios. Stocks of every company quoted in NASDAQ OMX Baltic (2011) Stock Exchange in Vilnius Official list for more than 10 years (2001 beginning – 2010 end) were investigated. Stocks of 14 companies satisfied preset 10 year interim criterion.DOI: http://dx.doi.org/10.5755/j01.ee.23.2.1542

THE INFLUENCE OF CAPITAL STRUCTURE ON BALTIC CORPORATE PERFORMANCE / KAPITALO STRUKTŪRA BALTIJOS ĮMONĖSE

Seeking for the optimal capital structure lasts for more than 50 years and still is very topical, especially during the market turmoil as it happened in 2008. No perfect answer is yet provided to the question of how large debt amount should be kept on the accounts. The main objective of the present paper is to analyze the impact of capital structure decisions on the equity performance and on the profitability of the companies located in Baltics. The study covered the time period of 4 years (from 2007 till 2010) and the sample data of 36 “blue-chip” companies listed on the Baltic Stock exchanges. The results of the study discover positive relationship between stock performance and sufficiency of equity capital. Besides, there was found an inverse relationship between the level of debt and capital profitability confirming the pecking order theory that in the best case the company should use self-generated funds. Santrauka Optimalios kapitalo struktūros siekiama daugiau nei 50 metų ir tai vis dar yra labai aktualu, ypač per finansų krizę, įvykusią 2008 m. Kol kas nėra gauta galutinio atsakymo į klausimą – kokio dydžio skola turi būti laikoma sąskaitose. Pagrindinis šio straipsnio tikslas – išnagrinėti kapitalo struktūros sprendimų įtaką akcijų rinkai ir Baltijos šalių įmonių pelningumui. Tyrimas apėmė ketverių metų laikotarpį (nuo 2007 m. iki 2010 m.) ir 36 patikimiausių akcijų ,,blue chips“ duomenų, įtrauktų į Baltijos vertybinių popierių biržų sąrašus, pavyzdžius. Atlikus tyrimą nustatytas teigiamas ryšys tarp akcijų ir akcinio kapitalo pakankamumo. Be to, buvo nustatytas atvirkštinis ryšys tarp skolos lygio ir kapitalo pelningumo, patvirtinančio kapojimo kvotos teoriją, kad geriausiu atveju kompanija panaudos savo sukuriamus išteklius.

THE IMPACT OF THE EURO ADOPTION ON NASDAQ OM X BALTIC STOCK EXCHANGE. ANALYSIS BY STRUCTURAL BREAK TESTS

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.

MULTIFACTOR ASSET PRICING ANALYSIS OF THE BALTIC STOCK MARKET

This study investigates whether the Fama–French three-factor asset pricing model is applicable for explaining cross-sectional returns of stocks listed in the Baltic stock exchanges. Findings confirm the validity and economic significance of the three-factor model for the Baltic stock market: only investors who chose to invest in value stocks during the reference period achieved positive returns by matching or beating the returns of the stock market index. The monthly returns of 8 Latvian, 13 Estonian and 27 Lithuanian company stocks are analyzed for the time period from June 2002 till February 2010 by the methodology presented in Davis, Fama, and French (2000). Cross-sectional multivariate regression is calculated with stock portfolios representing the book-to-market and capitalization of companies as independent variables along with the stock market index. The study concludes that these three factors in the three-factor model are statistically significant, but, in line with earlier studies, regression intercepts are significantly different from zero and the model is not statistically confirmed.p>

Public announcement induced market reactions on Baltic stock exchanges

PurposeThe purpose of this paper is to determine to what extent economically significant stock return and volume changes on Tallinn, Riga and Vilnius Stock Exchanges (TSE, RSE, VSE) are contributable to public announcements disclosures and which types of announcements drive these.Design/methodology/approachEvent‐study methodology was used to determine economically significant return and volume events.FindingsIt was found that 22‐37 per cent of return or volume events explained by public announcements was twice lower than reported in the UK. The greatest frequency of disclosures was attributable to financial disclosures as could be expected. Although, previous research indicates bigger magnitude of reaction to financial news, it was not observed in case of public announcements. Whereas, the magnitude of reactions on VSE was greater than reported on TSE and RSE, which indicates that VSE differs from TSE and RSE in its information processing.Research limitations/implicationsFirstly, all other mediums of disclosure besides public announcements are excluded. Secondly, the focus on public announcements discards all other factors that could induce market reactions. Thirdly, investors are assumed to act rationally.Originality/valueThe relative importance of different news items in inducing market reactions on the three Baltic stock exchanges has not been previously investigated. Only one previous study has covered a developed capital market of the UK, which means that this paper enables to compare its results to the ones achieved in a developing capital market setting.

Managing Capital Flows in Estonia and Latvia

The three Baltic countries have been able to combine, Estonia since 1992 and Latvia and Lithuania since 1994, (1) a fixed exchange rate, (2) liberalisation of the capital account before having a well-functioning and fully supervised financial system, and (3) very large current account deficits. At the same time they have gone through deep structural and institutional change, which has been even faster than in several other transition economies. How have they been able to manage such a combination of characteristics that would usually be regarded inconsistent? The answer is not in clever management or control of financial markets combined with sound fundamentals. Rather, the Baltic countries have lacked several such markets that might be sources of instability. There are hardly any inter-bank markets. Public debt is absent or relatively very small. After the boomlet of 1997, the Baltic stock exchanges have generally hibernated. Banking crises have been recurrent. Not only are these economies extremely small, their degree of monetisation is very low. There are very few assets and markets for speculative capital flows. Partially, this reflects sound fundamentals, but mostly it is an unintended consequence of policy decisions. One cannot expect the experience to be easily repeated in other countries.

Evaluating performance of Nordic and Baltic stock exchanges

PurposeThe purpose of this paper is to evaluate and compare performances of three Nordic (Sweden, Denmark, Finland) and three Baltic (Lithuania, Latvia, Estonia) exchanges.Design/methodology/approachPortfolio performance is estimated using two different approaches: traditional measures – Sharpe, Sortino and Treynor ratios; and alternative measures – reward to value‐at‐risk and reward to expected tail loss (RETL).FindingsThe findings highlight the differences and similarities in Nordic and Baltic stock exchanges and their performance trends after creation of common marketplace OMX. Returns of Baltic, like Nordic, exchanges are normally distributed. During the period of 2000‐2006, Baltic exchanges outperformed Nordic exchanges.Research limitations/implicationsThe research is limited to six stock exchanges that are members of common marketplace OMX. Proposed alternative performance measures did not diverge from traditional approaches, because, apparently, Baltic exchanges offer normally distributed returns and should not be considered emerging markets. These measures should be further tested in developing and emerging markets.Originality/valueThe findings have both theoretical and practical implications. To the authors' best knowledge, it is the first public attempt to estimate performance of Baltic and Nordic exchanges in the context of modern portfolio theory and, alternatively, new science of risk management (value at risk and expected tail loss). The paper argues for the usage of an alternative measure for performance valuation – RETL. Furthermore, the paper discuses merits and limitations of different approaches to risk and performance measurement.