Emerging markets arbitrages’ perception: Risk versus growth potential

Abstract

This paper relates to our analysis of the most important criteria for emerging markets investors. We calculated and
sorted both the correlation of price levels and the correlation of returns between six emerging European stock
market indices and the world’s most significant index: the Standard and Poor’s (S&P) 500. Our analysis established
a level of emerging markets price dependence on international investors with global market overview. We used a
unique dataset with three years of data on the indices and other indicators from the stock markets in Bulgaria,
Croatia, Hungary, Romania, Serbia and Slovenia. We compared both the correlation ranks of indices, with the rank
of different risk and growth parameters. Our research concluded that the correlation of price returns is most
dependent upon the level of corruption as a risk factor. Price level correlation results suggested that investors
choose to apply growth potential criteria in deciding where to invest. We proved that the correlation of price levels
to S&P 500 Index is dependant on demographic factors, proving it to be the most important factor in investor
perception.