An Investigation of the Role of Cross-Border Spillover of Returns and Volatility in the Estonian Stock Market

The paper examines the role of foreign stock marketsí price and volatility movements in the price and volatility movements in the Estonian stock market. Using daily log returns from July 8th, 1996 through December 31st, 2003 and applying a VAR-EGARCH framework, the author finds that there is a spillover of returns and volatility from foreign stock markets into the Estonian stock market. It is found that the stock prices in Estonia are influenced by the movement of prices on the markets of Denmark, Russia, Finland, the Czech Republic, Poland and the U.S.A. In general, the response to exogenous price movements is found to be contemporaneous, same-directional and symmetric, while the revealed impact of exogenous volatility-changes is rather market-specific and often asymmetric. The author also finds that the influence of the Finnish market on the Estonian market has significantly increased after the HEX-Group acquired the majority share in the Tallinn Stock Exchange and the integration of the Estonian stock market with the Finnish stock market began in April 2001.