Local and global illiquidity effects in the Balkans frontier markets

Abstract

We study market illiquidity across 11 national markets of the Balkans. In general, the EU member countries are more liquid than the nonmember countries. Turkey, however, has the most liquid market, while Serbia and Bosnia are the least liquid. Global illiquidity sourced from the US has a strong and positive impact on pricing in eight of the Balkans markets. In contrast, illiquidity transmitted from the EU impacts expected returns in only two instances, while local illiquidity is significant for just one market. Croatia and Slovenia are most susceptible to transmissions of regional illiquidity, each receiving illiquidity spillovers from four sources.

Keywords:

• market illiquidity
• illiquidity transmissions
• frontier markets
• Balkans

JEL Classification:

• G15
• G12
• C59

Notes

¹ Croatia joined the EU in July 2013, while Macedonia, Montenegro, Serbia and Turkey are classified as candidate countries.

² This index measures the performance of the largest 3000 US companies, representing approximately 98% of the investable US equity market.

³ The Bloomberg European 500 Index is a free float capitalization-weighted index of the 500 most highly capitalized European companies.

⁴ It is estimated that in the Serbian market less than 10% of the total market capitalization is liquid (Minovic and Zivkovic, 2010; Minvic, 2012).

⁵ More formally, letting be the information set consisting of all the relevant information available up to and including time , Granger causes if , where is the mean squared error of an – step forecast of conditional on the information set . In the above specification, represents the information set less the information contained in the past and present of the process.

⁶ Results of the GARCH test are available upon request.

⁷ In 2005 Serbia and Montenegro formed one country.