Stock market integration and diversification possibilities during financial crises: Evidence from Balkan countries

This paper investigates the short- and long-term linkage among the Macedonian, Croatian, Slovenian, Serbian, and Bulgarian equity markets during the period of 4 October 2005 to 31 December 2015. In order to assess the impact of the recent financial crises on the interconnection among the examined Balkan stock markets, the studied period is segmented into pre-, during, and post-crisis period. Johansen cointegration test finds no evidence of cointegration during the pre- and post-crisis periods. However, during the latest financial crises, the empirical findings support the existence of three cointegration vectors. This means that the recent global financial crisis and the subsequent euro crisis strengthened the connection between the investigated stock markets, thus decreasing the diversification possibilities that can be acquired in these markets. Furthermore, innovation accounting analysis reveals that during periods of financial turmoil, the Macedonian stock market is positively and actively influenced by the Croatian and Serbian markets. A significant implication of these results is that the integration between Balkan stock markets tends to alter over time, particularly during stages of financial disturbances.