Relationships Between Returns in EU Equity Markets in 2005–2016: Implications for Portfolio Risk Diversification

Under certain conditions, there are different relationships between stock markets. These relationships are one of the most important issues in portfolio analysis and they affect on the asset allocation or diversified risk. Usually the relations between markets intensify during and after the global financial crisis. In the article the relationships between European Union stock markets are analyzed. The main goal of research is to determine if the countries strongly related have any influence to the level of diversification. The Principal Component Analysis are used to determine the relations between the EU markets. Selected stock markets are also analyzed according to the diversification. The level of diversification are measured by the Portfolio Diversification Index, Rao’s Quadratic Entropy and the Diversification Ratio. In the research the data from the period 2005–2016 are used. Selected EU markets are analyzed in the sub-periods specified by the last global financial crisis which began in 2007.