Stock markets in the NMS – separately or together?

Today just a graph and small facts – but a discussion will come…


Figure 1. Stock market indices (PX – Prague; BUX – Budapest, WIG – Warsaw + FTSE London and DJ-US), all shares, home cur. index rescaled for last session in 2001 =100, dates 1994-2006.
Source: DataStream

Amid the recent falls in the three main stock markets of the NMS (Budapest, Prague and Warsaw) we can see that these markets co-move to a large degree. Regardless of issues like exchange rates and other country specific shocks (IPOs, macroeconomic factors, changes of base in the indices) there seems to be a large degree of co-movement in the markets which raises the question whether it makes sense for these markets to actually exist, or perhaps a common trading floor would be more efficient?
All three markets were setup in the early 1990s – the first trading sessions took place in June 1990 (Budapest), on the 16th of April 1991 (Warsaw), and on the 6th of April 1993 (Prague). Since their establishment, all three were expanding relatively steadily and moreover, quite similarly. They gained depth and liquidity, though are still far from most developed country levels in these respects. As for the evolution, the end of first quarter 1994 brought a first major correction (rather at the Warsaw and Budapest SE’s as the Prague one was still very young). The slump following the Russian crisis in 1998 was quickly recovered from, and the next common fall came in March 2000 – about 6 years after the previous one. This time the recovery was relatively slow (amid, among other events, the burst of the dot-com bubble), and it was not until late 2002 till all three indices picked up, gaining steadily from then on. The indices more than tripled since then, and May 2006, again 6 years after the previous slump followed with a fall of about 20% within a couple of weeks. Whether the falls mean a short term correction that has already began to pick-up is a different issue, yet as we see in Figure 1, the developments in all three stock market indexes are not very different, and moreover, do not seem to move away overtime.