Dynamic Linkages Among Developed, Emerging and Frontier Equity Markets of Europe

The purpose of this paper is to investigate long run relationship between developed, emerging and frontier markets of Europe. The paper applies Zivot and Andrews unit root test to examine stationarity of index series in the existence of a structural break. To account for instability in the long-run relationship between European developed, emerging and frontier markets, Gregory and Hansen test for cointegration is employed. The results suggest that European emerging markets are segmented from their matured counterparts, whereas unexpectedly, frontier markets are well integrated with the developed markets. Hence, emerging markets, and not frontier markets, provide good diversification opportunities to longterm investors. This evidence questions the de-facto assumption that only dominant markets influence smaller markets. These findings are expected to provide valuable inputs to global investors for creating an optimal investment portfolio