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Submission of this paper to the faculty predates date of submission to the Digital Commons office which is May 10, 2005. Date of upload to the Digital Commons repository is August 25, 2005.

Document Type

Article

Abstract

This paper investigates the impact of European Union membership on Baltic investors' ability to diversify. The research addresses the impact of E.U. membership on effectiveness of country-based diversificatin versus industry-based diversification strategies for Latvian investors. I compared correlation matrices of country index returns before and after the Baltic entry date of May 1,2004. Then, I created similar correlation matrices for the Baltic industries. In the pre-unification period, Latvian equity returns were inversely correlated with other European and U.S. indices after translating into the Latvian currency. However, after joining EU, cross-country correlations increased dramatically. As a result, Latvian investors have lost substantical ability to diversity internationally. Post-unification industry correlation results are inconclusive due to small sample sizes, indicating lack of ability to achieve diversification across industries. I also tested if the portfolio variance of nineteen equally weighted Baltic securities had increased or decreased after European unification. This test resulted in a lower portfolio risk indicating that as European markets become more integrated, risk decreases.

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