The Bucharest Stock Exchange Case: Is BET-FI an Index Leader for the Oldest Indices BET and BET-C?

Abstract

The current paper provides an inside-out view regarding the internal diversification potential of one frontier equity market, Bucharest Stock Exchange. In order to address the internal diversification potential, we used the Canegrati’s (2008) idea of determining the world market index leader. Thus, we applied the idea at Bucharest Stock Exchange level considering the three oldest indices (out of the seven currently reported indices) for the main equity market sector. Our working hypothesis is that if the financial sector index (BET-FI) Granger causes the older two indices (BET and BET-C), without being Granger caused by them, the diversification potential of Bucharest Stock Exchange is very low and limited to the six components of BET-FI portfolio constituents. Based on the findings, Bucharest Stock Exchange internal diversification power is reduced and limited to a handful of liquid blue chips or to the constituents of BET-FI portfolio.

Keywords: frontier market, diversification, Granger causality, Romania

JEL Classification: G10, G11