A Frontier Market Case: Does Bucharest Stock Exchange Have a Leading Domestic Index?

Abstract

A frontier market can play a significant role in the diversification of a global portfolio. Equally important are the companies selected in order to fulfill the diversification needs. We focused on Bucharest Stock Exchange, considered a frontier market, and we analyzed its own diversification power based on the presence/absence of a leading index that influences the price evolution of the other traded companies.

This idea was suggested by the strong position of the five listed closed-end funds in the equity sector of the Bucharest Stock Exchange. We show through combined correlation, regression and Granger-causality analysis that BET-Fi has a direct influence on Bucharest Stock Exchange blue chips represented by BET index. As follows, BET-Fi can be considered an index leader and we discuss the general implications of this finding.

Keywords: frontier market, financial investment companies, Granger-causality, regression, leading index

JEL Classification: G10, G11