International investment gradually increased during the late 1990s and the early 2000s with the emergence of markets the Czech Republic, Hungary, and Poland and this paper examines the strategy of investing in these three East Europe stock markets: In our analysis we employed four methods of portfolio construction and instead of choosing a standard period for portfolio evaluation, we use all the available data for different starting periods of portfolio evaluation, different historic periods to inference information for construction of the portfolio weights and different portfolio evaluation periods. Instead of obtaining an estimate of the portfolio weights and the total and mean portfolio returns, using an iterative technique with different starting periods of portfolio construction, different historic periods and different portfolio evaluation periods, we obtain distributions of the total and mean returns, the risk and all distributions of all the portfolio evaluation.
The Czech Republic is one of the most stable and prosperous of the post-Communist states of Central and Eastern Europe. Growth in 2000-05 was supported by exports to the EU, primarily to Germany, and a strong recovery of foreign and domestic investment. Intensified restructuring among large enterprises, improvements in the financial sector, and effective use of available EU funds should strengthen output growth.
Poland has steadfastly pursued a policy of economic liberalization throughout the 1990’s and today stands out as a success story among transition economies. Even so, much remains to be done, especially in bringing down the unemployment rate - currently the highest in the EU. Poland joined the EU in May 2004, and surging exports to the EU contributed to Poland's strong growth in 2004, though its competitiveness could be threatened by the zloty's appreciation.
Hungary has made the transition from a centrally planned to a market economy, with a per capita income one-half that of the Big Four European nations. Hungary continues to demonstrate strong economic growth and acceded to the EU in May 2004.
Investors willing to assume the additional risk present in these markets have been well compensated. Yet, many market analysts have indicated that such markets are somewhat of an abnormality, in that they tend to be characterized as thin, narrow and driven by poorly informed individuals rather than by fundamentals. It cannot be assumed, however, that investing in emerging stock markets is more dangerous than investing in more progressive countries, given the expected returns. The average investor may increase his or her returns if they hold portfolios which include foreign stocks. Since stock markets are not highly correlated and consequently do not fluctuate in tandem, it is expected that diversification leads to a higher return for a given risk. This study is not the first to investigate the dynamic linkages4 across the national stock indexes, but to our knowledge is one of only few that investigate these three country stock markets.
