A Nonlinear Model to Estimate the Long Term Correlation between Market Capitalization and GDP per capita in Eastern EU Countries

The connection between the macroeconomic development on one hand and the stock market dynamics on the other hand is the focus of many research initiatives. We are trying to apply the methodology used in the field of macroeconomic convergence to the dynamics of market capitalization for European economies. Under the general standard form of the convergence theory, which states that in the long run, as income per capita increases its corresponding growth rate will decrease, we propose a non-linear model that simulates the convergence based on data for the Central and Eastern European countries pursuing the estimation of a theoretical (hypothetical) optimal trend with respect to certain rational criteria. The model is applied on both macroeconomic variables and the market capitalization and we relate the differences that were found to the increased volatility of the latter set of data.