FINAL THESIS

The effect of the Crime crisis on stock co-movements

in Russia

Author: Aflitonova Kristina

Academic Director: Gatfaoui Hayette

 Academic Year: 2018-2019

Abstract

Keywords:
Acknowledgments
I am grateful for excellent teaching skills, guidance, and comments of my supervisor
Gatfaoui Hayette of IESEG school of Management, which has helped me tremendously
through studies.

Without Gatfaoui Hayette helpfulness and directness, the writing of my Thesis would have
been more challenging. I do appreciate my Professor’s expertise, ideas, and the
contribution to the econometrical and literature contents of this research. It is comforting
to know that whenever I have a question Gatfaoui Hayette answer right away.

Further, I would like to thank Kowalewski Oskar, the co-reader from IESEG school of

Management for his review of this research. Thank you.

 Contests

Chapter 1. Introduction ................................................................................................................ 6

1.1 Problem formulation .............................................................................................................. 6

1.2 Political background .............................................................................................................. 6

1.3 Objectives of the research ...................................................................................................... 7

1.4 Contribution of the study........................................................................................................ 7

1.5 Theoretical framework ........................................................................................................... 8

1.6 Limitations of the study ......................................................................................................... 8

Chapter 2. Theoretical Framework ............................................................................................. 10

2.1 Theoretical background ........................................................................................................ 10

2.2. Brief outline of the history and reasons for Crimean crisis ................................................... 12

2.3 Specific sanctions against Russia ......................................................................................... 14

2.4 The economic consequences of the Crimean Crisis for Russia .............................................. 17

2.5 The economic consequences of the Crimean Crisis for other countries ....................... 19
Chapter 3. Literature review....................................................................................................... 21

Chapter 4. Data and Methodology.............................................................................................. 29

Chapter 5 Results and discussion ............................................................................................... 32

5.0 Introduction ......................................................................................................................... 32

5.1 MOEX ................................................................................................................................. 33

5.2 RTS ..................................................................................................................................... 33

5.3 S&P 500 .............................................................................................................................. 34

5.4 FTSE 100............................................................................................................................. 36

5.5 CAC 40................................................................................................................................ 37

5.6 DAX .................................................................................................................................... 38

5.7 Nikkei 225 ...................................................................................................................... 39

Empirical Results Section One Regression of RTS CAC40 AND CR-Dummy........................... 47

RTS DAX REGRESSIONS table no 5.5 .................................................................................... 48

CHAPTER 6 CONCLUSION AND POLICY RECOMMENDATIONS .................................... 57

6.1 CONCLUSION.................................................................................................................... 57
References ................................................................................................................................. 59
Chapter 1. Introduction

1.1 Problem formulation

After the Hong Kong market crash in 1987, which was spilt all over the world, the effect
of crises on stock market co-movements has become a hot topic for academic debate.
Numerous researchers find links between local and global financial crises and changes in
stock market values (e.g. Claessens and Forbes, 2001; Inoguchi, 2014; Jiang, Ju, Hashmi,
2017). However, the recent crises in Ukraine and its effect on stock market movements has
not received due attention in the academic literature. Meanwhile, the rapid development of
the crisis in Crimea has led to severe economic consequences for the Russian economy.
The net outflow of foreign capital from Russia has reached $70 billion, causing the GDP
to fall from USD $2297 bn in 2012 to USD $1284 bn in 2016 (Kholodilin and Netsunajev,
2016). The crisis has also been exerting downward pressure on the Russian currency, the
ruble, and major stock market indices – MICEX and RTS, driving away international
portfolio investors into Russian economy (Kholodilin and Netsunajev, 2016). Moreover,
the sanctions imposed on Russia by the US and EU have made Russian economy less
import-dependent, causing a change in the fundamental economics underlying the
composition of Russian stock market indices. While the effect of financial crises on stock
market co-movements has been widely investigated in the academic literature, no empirical
evidence documents the influence of the Crimea crisis. This dissertation thus aims to fill
this gap in the literature and contribute to the research on international stock co-movements
and contagion by studying MOEX and RTS indices in 2009-2019 with particular
emphasize on the periods before and after the crisis in Crimea.

1.2 Political background

Crimea is a peninsula located on the northern coast of the Black sea, which has borders
with both Ukraine and Russia. Providing the shortest route to Turkey, numerous ports of
Crimea used to be important strategic points on the Great Silk route (Salameh, 2014).
After the accession of Crimea to Russia in 1783 as result of the Russian Turkish war,
Crimea has become a major military base of the Russian army, guarding the Russian
empire from further Turkish interventions. The Crimea peninsula remained under the
Russian rule up until 1954, when it was transferred under the rule of the Ukrainian
republic in the structure of the Soviet Union (Lenč, 2016). After the collapse of the Soviet
Union, Crimea remained the Ukrainian territory and was not planning to get back under
the Russian rule until spring 2014, when Ukraine was hit by the civil war.
The civil war in Ukraine, which burst out at the beginning of 2014, has resulted into the
change of the ruling coalition and has caused tensions in the country’s trade and diplomatic
relationships with Russia (Salameh, 2014). The final drop for the accelerating conflict has
been the crash of Malaysian airlines flight (MH-370) carrying 298 passengers over the
Donetsk region, of which Ukrainian authorities publicly accused Russia without providing
any substantial evidence. The disputes between Russian and Ukrainian authorities have
eventually led to annexation of Crimea, which also caused Russia’s major trade partners -
US, UK, France and Germany to impose sanctions on several Russian companies,
politicians and high net worth individuals (Lenč, 2016).

1.3 Objectives of the research

This research has several distinct objectives:

1. To measure co-movements of Russian stocks with foreign indices after the Crimea
crisis

2. To study the possible effect of the crisis on equity co-movements in Russia

3. To make conclusions regarding the effect of the Crimea crisis on Russian index values
and codependence with foreign indices

1.4 Contribution of the study

This study will make several important contributions to the academic research. Firstly, the
results of this study will be useful for portfolio managers and international investors,
considering expanding their portfolio with Russian stocks. Secondly, the information in
this study could help international rating agencies to better assess country-specific risk and
make conclusions on the vulnerability of the Russian stock market to shocks from the
external environment. Finally, the results of this study could be useful to Russian regulators
and policymakers in considering their further decisions regarding Crimea and Ukraine.
1.5 Theoretical framework
To set up a theoretical framework for the empirical analysis, this study draws upon
academic literature on stock market co-movements. A stock market co-movement is
defined as a tendency of two or more stock markets or indices to move accordingly, which
results in positive correlation between their price values (Claessens and Forbes, 2001).
Numerous researchers have tried to investigate the reasons for and the drivers of
international co-movements (e.g. Forbes and Chinn, 2004; Johnson and Soenen, 2003;
Babek, et.al., 2007). These researchers categorize the factors affecting stock market
movements into fundamental factors, or those caused by the changes in financial and
strategic position of companies, and behavioral factors, which are influenced by
perceptions and belief of investors buying these stocks. Thus, to guide empirical testing
this study uses the propositions of both the Efficient Market Hypothesis and the Prospect
theory.

1.6 Limitations of the study

As with any research, this study has potential limitations. Firstly, this research only
considers the co-movements of stocks in Russia, US, Germany, France and Japan.
However, the Crimea crisis could also have affected the co-movement of Russian stocks
with Chinese and Middle East markets. This represents an area for future research.
Secondly, Finally, the Crimea crisis may have long-term economic and political
consequences on Russia’s economy and stock market, which falls outside the scope of this
project. Thus, this represents another possible area for future research.

Finally, the effect of the Crimea crisis on stock co-movements represents an interesting
area both for academic research and investment practitioners. Drawing from the prospect
theory and efficient market hypothesis, this study aims to analyze the dependence between
MOEX, RTS, S&P500, DAX, CAC40 and Nikkei indices over the period 2009-2019..

The consequences of the acquisition of Crimea are still happening, and the economical-
diplomatic sphere does not restrict them. The world’s life-style has changed, and it could
be assumed that those changes are linked to the world’s polarization. The diplomatic tension
that brings back old memories from the cold war. Before February 2014, Ukraine was fully
dependent on the diplomatic relations with Russia, but soon things started heating up and
these two countries have changed notoriously after the Crimea crisis.
The primary objective of this work is to present a self-consistent study, unveiling the
outcome of Russian acquisition of Crimea and the Russian economic activity. The Russian
economic activity will be to be pragmatically estimated by focusing on two major indices:
MOEX and RTS during the period of 2009-2019 years. From the point of view of Russian
and foreign investors it would be interesting to see if the dramatic changes occurred and
their portfolio was not effective. The major reason to choose foreign indices is that they are
quite stable and do not react spontaneously on the small changes. Crimean crisis touched
Russia, EU and US, so it could show how the major indices behaved in this circumstances
via statistic approach and time-series method as it is not excluded that future crises will
occur in Russia again. This Thesis is devoted to providing the academic research and tool
to analyze the information spreading velocity. This is a nouvelle approach, considering the
fact that there are few available studies demonstrating the influence of a certain event on
the Russian economic situation. Therein, the Russian occupation of Crimea, materialized in
political and economic sanctions is going to be used for benchmarking our approach.
Initially it is expected that Russian occupation of Crimea reveal changes not only in Russian
economy, but also in the world’s economy. In order to test the hypothesis seven different
stock indices are going to be employed.
Chapter 2. Theoretical Framework

This chapter aims to set the institutional environment for the conduction of this research.
The Crimean crisis has had dramatic consequences for many world economies. Not only
has it affected the trade agreements between many countries but has also affected their
economies and currencies. This chapter gives a brief outline of the escalation of the Crimea
Crisis and investigates its effect on the economies of Russia and EU. The chapter then
outlines the dynamics of the key stock market indices in 2009-2018, and briefly describes
the effect of the Crimean crisis on their domestic economies.

2.1 Theoretical background

Primarily, deserving to be considered, a law aspect, which describes the efficiency and
transparency of the financial market of Russian Federation. The Department of Strategic
Financial Market Development (DSFMD) carries out the work aimed at improving the
efficiency and transparency of the financial market of Russian Federation and its
investment attractiveness. In particular, the DSFMD prepares the Development Guidelines
for Russian financial market for the medium term including some proposals from the
professional community in order to improve financial market regulation.

There are several priority areas of DSFMD, which include:

• analysis of the financial market of Russian Federation;

• analysis of international standards and international practices in financial markets;

• strategic planning of the financial market development and organization of the

implementation of measures for its development;
• participation in the development of infrastructure and financial market instruments;

• participation in the establishment and standardization of regulation and supervision

of new entities engaged in professional activities in the financial market
(www.cbr.ru/finmarket).

Nowadays Russian private equity is a less institutionalized, more recent, and rather
unproven investment discipline. This process began only after the destruction of
communism and as a result, post-communist privatization took a long time of recovery.
Originally, private equity is not a major source of capital for Russian businesses as well as
a major contributor to Russian economic growth. How have early private equity funds fared
in Russia? In the early 1990s, because of privatization and thus the accessibility to cheap
assets on the market, a burst of Russian private equity activity occurred. Therefore, there
are approximately $3 billion has been raised since 1993 (Astrid S. Tuminez, October 2002).

Early capital raised for Russian private equity focused on the next parts: food-processing,
communications, natural resources, media, pulp and paper, real estate, technology,
consumer goods, pharmaceuticals, transport and distribution, financial services, transport
and distribution. General partners who managed private equity funds tended to be
generalist in orientation, given the nascent state of the Russian market economy, however
to predict everything was very difficult (Astrid S. Tuminez, October 2002).

On the one hand, some returns are credible for investments made in the earlier phase of the
Russian market, as some funds are reported of having spectacular annualized Internal Rate
of Return of 70 percent to 340 percent on a significant number of companies in their
portfolios. On the other hand, these returns are highly unlikely to be the norm going
forward. For instance, one private-equityfund manager was interviewed of his financial
situation: “1993–1997 was the short-term golden age” of Russian private equity; in the
period following, many funds lost money and never recovered.

Currently, because of economic reforms and the relative political stability under Putin a
number of Western and Russian groups are showing renewed interest in Russian private
equity. This interest is being triggering by economic growth in Russia over almost five
years, stable fiscal policy, improvements in the Tax Code and in corporate governance. In
the past two years, several groups have announced plans to launch funds however, the
feedback from fund principals indicates that fundraising for this taken action has been slow
and challenging. It remains to be seen if investors will take the risk in Russian private
equity or it’s not worth to be done (Economist Intelligence Unit Sponsored by Trust
Investment Bank, January 2007). Would not it be interesting to observe if cash-rich Russian
companies, banks, and financial groups will express the interest in private equity?
Unfortunately, for now, most investors remain skeptical. The difficult process of
globalization and recent report of blue returns on private equity in the developed markets
are partially driving the lack of investor interest and enthusiasm for Russian private equity.
However, this lack is also concerned by regulatory, legal, financial, and tax risks, along
with police corruption and the absence of more competitive dynamics in making deals. All
these factors may prevent from making high returns in any Russian private equity
investments (Astrid S. Tuminez, October 2002).
To conduct the research this study will use the Efficient Market Hypothesis (EMH) and
Prospect theory. The EMH suggests that stock market prices reflect all available
information regarding companies’ financial position and future prospects. In contrast, the
Prospect theory states that stock market prices are dictated by expectations of investors
(Suranovic, 2010). Since the Crisis in Crimea has affected both the future financial
prospects of Russian companies and caused panic among both Russian and international
investors, both theories in combination are considered to provide the suitable theoretical
framework for investigation of stock market co-movements before and after the Crimea
crisis.

2.2. Brief outline of the history and reasons for Crimean crisis
In view of the economic aspect, the economies of the two countries are closely intertwined
and these ties between Russia and Ukraine has caused a negative impact on the situation
overall as well as on the living standards of its citizens. From the first days of the creation
of the CIS, Russia has set a strategic goal – to develop comprehensive mutually beneficial
cooperation with Ukraine, but instead of cooperation, Russian government was faced with
a lack of understanding from its ally, the things are heating up and finally Ukraine
demonstratively distanced relations with Russia, despite the fatal economic dependence on
it.

Firstly, Ukrainian decision about emerging to European security system is based on the
leading role of NATO. While Russia is trying to counter the leading position of NATO and
establish partnership relations between NATO and non-NATO countries, Ukraine tries to
create conditions for its own entry into the Western security system by encouraging the
growing influence. At the same time, according to the survey, half of Ukrainian society
were against joining NATO.

Secondly, another conflict is the goal of Ukraine's policy, to form the regional structures
and unions "without Moscow" with the leading role of Ukraine. This coalition is
implemented by GUUAM group (Georgia - Ukraine - Uzbekistan - Azerbaijan - Moldova),
that give on more concern for Moscow.

Thirdly, "Gas conflicts" had a great impact on Russian-Ukrainian relations. Political

situation in Ukraine began to be insecure and, in addition, significant volumes of gas are
simply pumped out of the export pipelines passing through the territory of Ukraine.
Ukraine's actions can be explained by Russia’s critical dependence on the Ukrainian transit
system (up to 90% of Russian gas exports to Europe go through Ukraine).
The beginning of 2006 was marked by increased tension between Russia and Ukraine.

 The conflict over the price of gas supplied to Ukraine.

 Conflict over the location facilities of marine and military fleet in Crimea.
 Restrictions in foreign trade (For example, on 20 January 2006, a ban on the import
into Russia of all types of animal products (meat, meat products, eggs, fish, milk,
cheese, butter, canned food) from Ukraine came into force).
 Situation concerning Russian language in Ukraine (At the end of September 2006,
the harsh statements was imposed by Ukrainian authorities to discriminate Russian
language in Ukraine)

The primary reason for the civil war in Ukraine and the annexation of Crimea that followed
after the start of political turbulence in Ukraine was the clash of economic interests of
Russia and the EU. In 2012–2013 the EU came up with initiatives to sign Deep and
Comprehensive Free Trade
Agreements (DCFTA) with Georgia, Moldova, and Ukraine, which were aimed at
providing the

EU with additional markets for its products. At the same time, Russia aimed to extend the
Belarus– Kazakhstan–Russia customs union and was also interested in Ukraine joining it.
Thus, Ukrainian government was faced with the choice either to enter into partnership with
EU, which could potentially bring further economic and political associations in the future,
or to cooperate with its largest and most long-standing trading partner – Russia. This
struggle has become a major point of conflict for Russia and the EU at the end of 2013
(Lenc, 2016).

The Ukrainian president at that time, Victor Yanukovych, has made his initial choice
towards Russia, yet this choice was argued by opposition, who were in favor of the Western
orientation. The protests started by young people gradually grew into an uprising led by
political forces, which diminished the presidency of Yanukovych on 22 February 2014 and
established the temporary Government under the leadership of new President Yatsenyuk
(Kalotay, 2014).

The view on this sudden political change differed radically in the EU and Russia. In the
EU, this was presented as a legitimate action of people against a political regime that they
were dissatisfied with. However, in Russia the change of power in Ukraine was viewed as
an illegal and almost terroristic attack on the existing political system, which also included
discrimination behavior towards Russian-ethnic parts of the Ukrainian population. As a
result, Russia has considered this threat to Russian ethnicity in Ukraine to be a sufficient
justification for military intervention into the conflict. The conflict between Russia and
new Ukrainian government was further escalated by
the change in political structure, which abandoned the previous Government’s concessions
to Russian population of Ukraine in terms of language rights. Pro-Russian movement was
the strongest in the Autonomous Republic of Crimea, where Russian-speaking population
held the majority (59%) of the voting rights. With the help of Russian military forces, the
new Ukrainian authorities in Crimea were removed and a referendum was held on the
question of joining Russia. The results of the referendum were positive and Crimea has
become an Autonomous Republic of the Russian Federation (Kholodilin and Netsunajev,
2016).

However, due to nuclear guarantees provided to Ukraine by Russia, UK and US in the 1994
Budapest Memorandum, the Russia-Ukrainian conflict could not remain within the region.
By 1994 Ukraine stored the 3rd largest amount of nuclear weapon, which it promised to
give up to the participating states in exchange for their assurance of the security of
Ukrainian territory. Naturally, a military intervention on behalf of Russia into a nuclear-
rich country has caused the UK and US to impose punishment on Russia in the form of
sanctions for compromising the global nuclear nonproliferation agreement. Following the
introduction of sanctions, economic and trade relationships between the EU, US and Russia
have deteriorated to the point, which is only comparable to the period of Cold War (Lenc,
2016).

2.3 Specific sanctions against Russia

To disclose the relevance of the topic, it is important to dig deeper in the history of Crimean
crises.

Culture makes countries unique. Its geographical position, its historical path, as well as its
interaction with other ethnic cultures determine the peculiarities of Ukrainian culture.
Historically, Ukraine is torn between the European Union on the one hand, Russia on the
other. The geographical position of Ukraine is very favorable, as the country lies on the
crossroads of the ways from Asia to Europe.

From the beginning, Ukrainian’s relations with Russia have been the priority of Ukrainian
policy. Today, this is a sensitive issue as these relations affect the economic, political and
social spheres and both States, based on attempts to find common interests and mutually
beneficial solutions, have become more pragmatic.

For the European Union (EU), Ukraine is a potential candidate for future agreement and
the first one was signed in March 2014 directs the tight political and economic cooperation
between the European Union and Ukraine.

The European Union is one of the most significant investors in Russia. It is estimated that
up to 75% of foreign direct investment and investment in Russian stocks comes from EU
member states. EU is dominating in terms of exports to Russia by machinery and transport
equipment, chemicals, medicines and agricultural products.

Talking about Crimean crises and EU policy during this period it is necessary to mention
United States (US) sanctions against Russia, which is one of two main autonomous,
sanctions regimes, imposed along with those of the EU under pressure. The undertaken
measures are put in place against targets in Russia, Ukraine and the occupied Ukrainian
territory of Crimea and these measures are imposed against different participants of the
capital market. It can be individuals and entities (asset freezes, travel bans) and curbs on
financial transactions with Russian companies operating in specific sectors (finance,
defence and energy). Furthermore, there are restrictions on dealings in certain forms of
debt and shares with the main large Russian firms, including energy companies, Rosneft or
Novatek; the country’s largest bank, Sberbank, and one of the largest defence
conglomerates, Rostec.

Russia has also imposed its own retaliatory sanctions, which it terms “countermeasures”,
in the form of diplomatic and economic measures (visa and agricultural ban) against targets
that include the US, the EU, Australia, Canada and Norway (O’Kane, Michael, 2014).

There are some outcomes of sanctions on business ties with Russia:

Industry:

• The German concern Rheinmetall has stopped supplying equipment to Russia

(NEWSru.co.il);
• The German transnational concern Siemens announced that it would strictly obey
all the sanctions imposed against Russia (Forbes.ru, 27.04.2014);
• The French company Renault Trucks Defense, owned by the Swedish concern
Volvo, has suspended the development of a joint Atom project for a combat vehicle
with Russia (LB.ua, 3April 2014);
 • The Italian company "Fincantieri" suspended a joint project with the CDB MT
"Rubin" on the development of the small non-nuclear submarine S-1000 (LB.ua,
11 August 2014);
• The French company EDF Trading abandoned the Russian power-generating coal
of the Zarechnaya company;
• Saras, an Italian oil refining company, has postponed plans to set up a joint venture
with Rosneft for the sale of oil and oil products.

IT business:

• American IT companies, including Microsoft, Oracle, Symantec and Hewlett-

Packard, ceased cooperation with Russian banks and companies for which the US
government imposed sanctions (РОСИНФОРМБЮРО, 30.04.2014);
• The termination of work of such companies as Amazon, eBay and Apple in Crimea

(Корреспондент.biz, 18 September 2015);

• The Blizzard company suspended access of Crimean people to their accounts on

Battle.net

• The largest online store of China-AliExpress, part of the Alibaba Group, has
stopped serving residents of Crimea.

Financial and economic sphere:

• On March 21, 2014, international payment systems Visa and MasterCard stopped
servicing cards issued by Russian banks affiliated with persons from the list of US
sanctions. Among the first victims were customers of the banks of AKB Russia,
Sobinbank,
Investkapitalbank, SMP Bank, Finservice

(http://newsru.com/russia/21mar2014/sankcii_banks.html);

• On April 16, the Bank of Cyprus ceased operation of all its branches in Crimea “in
connection with the latest events on the Crimean Peninsula”;
• The leaders of more than 30 companies, including the leaders of the companies:
Goldman Sachs, Morgan Stanley, ConocoPhillips, Airbus Group, Visa Inc., Alcoa,
 Siemens, Citigroup, International Paper Company, Pepsi, Eni, refused to participate
in the St.
Petersburg International Economic Forum., Bain & Company, Enel, E. ON,
Boeing, Deutsche Bank;
• On December 26, the VISA and MasterCard payment systems stopped servicing
their cards in Crimea (https://au.finance.yahoo.com/news/russian-bank-customers-
barred-visa);
• At least part of the Vietnamese banks refused to open letters of credit and make
payments to Russian banks under sanctions.

As it is well known Russia has been borrowing money from US financial institutions, then
it was restrained and Russian’s access to foreign exchange reserves was limited as well.
Due to the severe consequences of the financial sanctions Russian energy sector had to
slow down the ambitious through a technology and long-term financing ban (which is
highly dependent on new Western technology) (De Galbert, Simond, 2015). In Russia,
people do believe that sanctions imposed by the West will affect the overall economy with
a reduction in trade and assets frozen specifically would cause major impacts.

The Russian Direct Investment Fund (RDIF) and other private equity players were highly
focused in boosting foreign trade before the subversive events of 2014. In fact, the RDIF
has raised three joint ventures with Japan, South Korea and Italy in order to develop
economic cooperation like trade or investment between each respective country. They also
currently have two more joint venture capital funds on the road with China and France
(https://rdif.ru/).

Finally, as a result of the ongoing crisis in Ukraine and more specifically the recent capture
of the Crimea region by the Russian government has the potential issue to put away
investors and private equity firms from making commitments in both countries. Levels of
private equity investment would drop significantly because of sanctions put on Russia with
certain restrictions from the US and the EU. In addition, there is likelihood that investors
would like to take less risky portfolio companies and thus Russian and Ukrainian
companies would lose value.

2.4 The economic consequences of the Crimean Crisis for Russia

Despite the fact that annexation of Crimea was presented as a Russian military success,
together with the sanctions imposed by the EU and US, it has negatively affected several
areas of the Russian economy. First, the integration of the region of Crimea into Russia
was a costly process, as the main hard and soft infrastructure, such as roads, hospitals and
banks, was left in the poor state after the Ukrainian reign (Kholodilin and Netsunajev,
2016). Second, the pensions, salaries and social benefits for Ukrainian people had to be
raised to Russian levels, which were considerably higher than in Ukraine. These two factors
have put additional pressure on the Russian budget. Another negative budget factor was
the decline in oil prices, which also took place after the introduction of sanctions. Third,
Russian business interests in Ukraine were damaged, as new authorities started to
nationalize Russian property (Lenc, 2016). In addition, several post-Soviet republics,
which were going to join the Belarus–Kazakhstan– Russia customs union changed their
mind on this idea, hindering Russia's ambitious foreign trade plans. Fourth, the sanctions
had a negative effect on the FDI into Russia, which has been one of the remarkable success
factors after Russia's transition from command to market economy (Kalotay, 2014). In
2009 the FDI in Russia exceeded $300 billion, and by 2012 this figure had risen to $400
billion. With figures like this, Russia has entered a group of leading investors across the
globe and among other emerging economies, its success has only been bitten by China. It
is estimated that up to 75% of foreign direct investment and investment in Russian stocks
came from EU member states before the Crimea Crisis (Kalotay, 2014). Graph 1 shows the
dynamics of the FDI in Russia after the Crimea Crisis.

Graph 1. FDI into Russia, 2014-2018, USD million

Source: Tradingeconomics.com, The Central Bank of Russia

As can be seen from the graph, the FDI into Russia has declined from USD $12 billion at
the beginning of 2014 to zero and subsequently turned negative by the start of 2015.
Followed by a temporary increase to USD $2.5 billion at the beginning of 2015, the figure
turned negative again in the third quarter of 2015. The situation started to improve only by
the start of 2016, yet the Russian FDI performance still remains even nowadays.
Consequently, the strategic benefits of owning Crimea are very significant:

 Russia received a rich military infrastructure of the Crimea (including a network of

airfields, expensive underground facilities and military towns).

 Access to substantial reserves of energy resources.

 Most of the Ukrainian space for military and marine fleet.

 Convenient zone for the development of tourism.

 Russia removes the burdensome costs associated with the lease.

It is worth to mention the negative effect of the Crimean crisis, which was documented in
several academic studies. Kholodilin and Netsunajev (2016) find that, on average, 1.97%
of Russia's quarter-on-quarter GDP growth was lost due to sanctions. Hoffmann and
Neuenkirch (2015) study the effect of sanctions on Russian stock returns. They find that
escalation of the Crimea Crisis has reduced Russian stock returns by 6.5 percentage points.
Overall, it can be concluded that the Crimean Crisis has had very severe and long-lasting
negative effect on the Russian economy.

2.5 The economic consequences of the Crimean Crisis for other countries
Kholodilin and Netsunajev (2016) suggest that 25 out of 28 EU states suffered export
decreases because of sanctions. They further document that in 2014 the exports of the EU-
member states into Russia declined on average by 14% compared to 2013. The most
exports were lost by Malta (-78%), Cyprus (-42%), and Belgium (-27%), while Germany
and UK suffered from an 18% decline.

For France and Italy, the decline was not as dramatic – only 12%., yet still quite significant
for the declining domestic economies of these states. Taking into account the recent
decisions to continue the imposition of sanctions made by the EU and US, it becomes
increasingly more important to study the long-term consequences of such serious political
decisions, for example, regarding their effect on major stock market indices in the affected
countries.

As a final point, in order to describe the institutional context for the study, this chapter has
investigated the main reasons for the Crimean crisis and analyzed its consequences for the
EU countries and Russia. At the end of 2013 Ukraine, which has been historically at the
crossroad between EU and Russia had to make a choice of whether to join a free trade
agreement with the EU, or to join the Belarus–Kazakhstan–Russia customs union. While
the Ukrainian president at that time, Victor Yanukovich was strongly in favor of the
Russian proposal, the growing opposition in the country was strongly oriented towards the
West.

These internal political tensions have resulted in the civil war in Ukriane, which burst at
the beginning of 2014, and led to the change of political regime. Due to the discrimination
of the Russian population by new authorities, Russia took military action against Ukraine
and annexed Crimea – the region, where Russian ethnic population form the majority of
voting rights. This move has caused EU and US to impose economic sanctions, which had
a drastic effect not only on the Russian economy, but also on the economies of sanction
initiators. The next chapter will look at the effect of sanction on major international stock
market indices, set up the theoretical framework for the study and develop the hypotheses
to be tested
Chapter 3. Literature review
In 2014, the recent financial crisis came off and had a large impact on Russian markets.
For all market participants it is vital to understand the influences of the crisis on the
different financial mechanisms such as portfolio risk management, rebalancing, and
speculation via Prospect Theory and Efficient Market Hypotesis.

Historically, Prospect Theory was first proposed by Kahneman and Tversky in 1979.
Different from traditional utility theory, regarding decision maker, Prospect Theory
suggests that person evaluates a prospect based on gains and losses rather than on final
result and view gains and losses separately from different sides.

Prospect Theory aims to explain people's future decision under uncertainly conditions.
There is a note that Prospect Theory had been an area dominated by Expected Utility
Theory. Expected Utility Theory posits the framing of the problem (Diamond 1988; Elliot
and Archibald 1989; Loewenstein 1988; Paese 1995), which directly violates Expected
Utility Theory heavily influences that person’s decision-making.

Prospect theory is well known as loss-aversion theory, holds that as human’s dislike losses
more than equivalent gains meaning that people are more willing to take risks in order to
avoid a loss than to take a risk in order to obtain an equivalent gain. It is a «human being»
to make decisions between alternatives that involve uncertainty and risk – such as the
percentage likelihood of gains or losses. The theory of behavioral economics based on
experimental work of Daniel Kahneman, an Israeli-American psychologist and Amos
Tversky (1996).

Efficient market hypothesis (EMH) suggests that the current price integrates all publicly
available information and stock prices are partially predictable. Eugene Fama’s (1970) in
influential survey article, named “Efficient Capital Markets” describes the securities
markets and its efficiency in reflecting information about individual stocks and about the
stock market as a whole. In simple terms, information arises; the news spreads very quickly
and is incorporated into the prices of securities without any delay. Thus, neither technical
analysis nor fundamental one would enable an investor to gain returns greater than those
that could be obtained by holding a randomly selected portfolio of individual stocks with
comparable risk. However, fundamental analysis studies past stock prices in order to
predict future and technical- studies financial information such as company earnings, asset
values and other to help investors select an appropriate stock, so it is a great point.
 The motivation of this research is explained by focusing on the Russian economy, the event
“Acquisition of Crimea” during March 2014, resulted in a broad package of economic and
political sanctions that Russia is still suffering. The after-coming Crimea crisis revealed
the strength and the weakness that the Russian economic policy has.

In this frame of reference, it results interesting for the academic group to understand the
new challenges that the economic management has ahead. It has been five years since the
Russian occupation of Crimea, and the speculations about the outcomes of the crisis are
still active. To avoid chaos and other hard situations this thesis aims to study different
aspects to perform Efficient Market Hypothesis. The available material to do the research
is contained in database of seven stock market indices.

Based on the work of [KT73] the research was initiated, perceiving that a person makes
decision not focused on the results but grounded on the uncertainty of success. In this
context, the Expected Utility Theory (EUT) formulates the problem of choices in terms of
the probability of success.

In agreement with the Efficient Capital Markets (ECM) are highly influenced by the
communication speed. There is a connection between the price of a certain stock and the
information available of that particular stock index. In the mentioned article, the price
stability of a certain stock results affected with information that concerns the stock. This
property breaks the paradigm of memory 1 . This paradigm establishes the dependency
between the prices of a certain stock with the stock’s price- history.

Gathering the findings shown in [KT73, Fam69] one shall conclude that the price of a
certain stock depends on the available information. In this context, the spreading out of
news alters the finite set of known information. At the very beginning, one must admit that
the occurrence of news have random distribution, therein the uncertainty is propagated to
the market and to the price of the analyzed stock. In this Thesis, these concepts will be
revisited and identified the direct effects of the Russian occupation of Crimea on the
Russian economy.

In despite of, knowing the stochastic nature of the ECM and EUT features, it results
interesting for a certain investor, describe the changes on the price of a stock in terms of
the changes of other stocks, rather than the information and news. As a matter of facts,

1 In mathematical modeling this paradigm gives sustain to modeling employing Markov’s chain. A Markov

chain is the representation of a phenomena that changes the state based on the past states.
news and information add stochasticity to the modeling, and it’s reflected in the quantity
of interest as a risk-adjustment coefficient.

During the development of an economic crisis, any investor would like to understand the
market size and the market behavior, finding the diversification of the available options. In
this frame of reference, the concept of co-movement arises as an alternative to measure the
variations of two or more markets, focusing on the possible existing inter-relation.

As it was established, prices fully reflect all the given information from different areas and
sectors, but news is by definition unpredictable and, thus, resulting price changes must be
unpredictable and random. This is the explanation of logic of the random walk idea.
Tomorrow’s price change will reflect only tomorrow’s news and will be independent of
the price changes today. However, many financial economists and statisticians began to
believe that stock prices are at least partially predictable based on past stock price patterns
as well as certain “fundamental” valuation metrics. Moreover, many of these economists
made the far more controversial claim that these predictable patterns permit investors to
earn excess risk-adjusted rates of return.

Obviously, market pricing is not always perfect. After the fact, we know that markets have
made egregious mistakes during the recent Internet bubble as well as psychological factors
influence securities prices.

In the literature section the author has reviewed academic researchers from different areas
to understand the relationship between different kinds of assets with crisis’s influence and
its consequences afterwards. These scientific researchers are containing different kinds of
data with different period of lengths, different econometric models, paying attention on the
political and economic factors.

During the period of extreme market movements and financial crisis, each investor would
like to benefit from their portfolio diversification thus they are trying to find the way of
best investments and determine for such purpose more or less stable financial system.
Therefore, studying comovements is important to assess the effectiveness of diversification
and the functioning of the financial system in general. Why is it important to start with the
study of co-movement? First of all, in view of authors and scientists, there is no explicit
definition of co-movement in the literature review. According to Dirk G. Baur (2003), co-
movement of the market index is equal to the parallel movement, which is called "moving
with" or "sharing movement" in the same direction. On the same way the behavioural
finance studies examine the impact of psychological factors on the stock markets. There
are some Evidence come up from the recent studies, which are conducted on behavioral
finance and these guides are important source for the development of idea and to think in
a different way about the traditional investment norms. In fact, by applying the
psychological theory of human behaviour to the financial markets and using it as a tool for
understanding investor decisions, we can easily be in a better position to understand the
behaviour of unreasonable investors.
L. Kengatharan and N. Kengatharan (2014) studied either or not the psychological factors
are associated with financial markets investments. The author argue that psychological
factors play a significant role in behavioral finance theory. The authors highlighted that the
behavioral finance studies psychological behaviour such as emotion and panic, which may
influence the behaviour of individual investors. Therefore, psychology and anthropology
can be used to explain irrational investor behaviour. The behaviour which is not explained
by the economist as a scientific and systematic approach of accepting or rejecting the offers
in a market.
According to behavioral finance, individual investors do not always behave in their own
best interests. Mitroi (2016) argues that anomalies in prices can be studied through
behavioural finance by incorporating the influencing factors, which can be internal factors
of market investments or can be the external factors for the market investment.
Teräsvirta and Patton (2004) describe co-movement as "co-breaking”, "co-integration" or
"cotrending". This definition has a special technical term (Webster’s New World College
Dictionary, 1999) and cannot be found in a common dictionary, its meaning is quite vague
and give only the associating noun-commotion. Among different traded securities, the term
of co-movement took place as positive correlation of returns. There are three views of such
co-movement:

• The traditional view that explains the co-movement of securities through positive
correlations and such aspects as cash flows or discount rates;

• "Category-based" co-movement occurs when individuals classify diverse shares

into the same asset class and shift resources in and out of this class in correlated ways;

• "Habitat-based" co-movement is the opposite of "Category-based" co-movement.

A group of investors restricts its trading to a given set of securities, and moves in and out
of that set in tandem (Nicholas Barberis, Andrei Shleifer, Jeffrey Wurgler, 2002).

Nevertheless, a number of recent papers, present evidence suggesting that the traditional
view of co-movement lacks of some information. Froot and Dabora (1999) study Siamese-
twin stocks, which are claims to the same cash-flow stream, but are done their business in
different locations. Another example is Royal Dutch, traded primarily in the U.S., and
Shell, traded primarily in the UK. If the reason is news about fundamentals, return of these
two stocks should be perfectly correlated. However, in fact, as Froot and Dabora show,
Royal Dutch moves more with the S&P 500 index of U.S. stocks than Shell does, while
Shell moves more with the FTSE index of U.K. stocks. Also, prices policy affects
commodities and has strong co-movement. Pindyck and Rotemberg (1990) studied such
commodities as wheat, cotton, copper, gold, crude oil, lumber, and cocoa, they are chosen
to be independent of one another. They are neither complements nor substitutes and grown
in different climates and used for different purposes as well. Therefore, there is only on
source of price correlation-aggregate demand. However, Pindyck and Rotemberg built
several forecasting models and did not find enough news volatility about demand to fully
describe the co-movement.

According to the journal of International Money and Finance (2005) «Explaining co-
movements between stock market: The case of US and Germany » the authors Alessandra
Bonfiglioli and Carlo A. Favero explain the co-movements between stock markets by
considering interdependence and contagion in a short or long-term run. Therefore,
allocation of the asset should be with a long-term horizon but on the other side, their
empirical evidence on the importance of contagion in the shortterm interdependence
between the two markets illustrates the risk of any short-term asset allocation (Alessandra
Bonfiglioli and Carlo A. Favero, 2005).
It shows the importance of the correct choice of the timeframe for the study. To overcome
the limitations [BF05] contained in the definition «co-movement» as the interdependence
and contagion in a short- or long-term run, for countries where the political situation is
complicated, countries in war, countries with economic problems, the interdependence
between stocks is better to analyze in short-term periods, while in stable economies the
interdependence should be analyzed in long-term periods.
When it comes to the US dollar against stock market, more recent articles, such as Lien
(2009) and Darwin (2009), and one more scientist Pethokoukis
(2009), suggest inverse relationship between the US dollar and stock price. Therefore, the
US dollar can be used as a hedge for the stock price. However earlier, during the long term
study by Soenen and Johnson (2002), based on the daily observations of S&P500 index
and US dollar during the period from 1992 to 2002, found a significant positive relationship
between the price movements of US dollar and S&P500 index, but unfortunately Soenen
and Johnson (2002) couldn't confirm any causalities between the changes in S&P500 and
US dollar.
Brian M. Lucey (2005) and Svetlana Voronkova (2005) and other economists wrote the
discussion paper about Russian equity market linkages before and after the 1998 crisis.
They discovered the relationship between Russian, developed markets, and other Central
and Eastern European equity markets over the 1995-2004 period. During this period the
Russian crisis of 1997-1998 had major impacts on equity markets worldwide. Gelos and
Sahay (2000) explore financial spillovers, due to external crises, to CEE foreign exchange
and stock markets. They find increasing financial market integration since 1993, measured
by the change in (unadjusted) stock return correlations (Brian M. Lucey, Svetlana
Voronkova, 2005).

Co-movement underlines the integrity of the economic system in general. There is no doubt
that any kind of crisis markets have a deep impact on the financial markets. For instance,
crisis in the U.S markets caused an abnormal influence on the European and Asian markets
on the next day. This impact is also immediately reflected on the prices on the second day.
Moreover, due to regional closeness of Canadian and US, Canadian market is sensible.
Another outcome is that Britain responds to any crisis in the US on the very same day and
even the next day. On the second day, overreaction is neutralized by the inverse correction.
Other stock markets, like Japanese and Australian, have tried to adapt themselves according
to any crisis that takes place in the US. It is not surprising, however, that developed
countries are economically integrated and thus they have co-movement among them.

Another recent research indicates the relationship of foreign institutional investment (FII)
flows to the Indian equity market with its possible covariates based on a time series of daily
data from 1999 to 2002 (Paramita Mukherjee, Suchismita Bose, Dipankor Coondoo). The
first type of their research includes variables reflecting daily market return and its volatility
(signifying risk) in domestic and international equity markets, based on different major
indexes, as well as measures of returns in these markets. The second type of variables, are
about currency, specifically daily returns on the Rupee-Dollar exchange rate, short run
interest rate and index of industrial production (IIP).

These variables are likely to affect foreign investors' expectation about returns in the Indian
equity market. Also, daily FII flows are distinguished between three kinds of flows,
namely, FII flows into the country or FII purchases, FII flows out of the country and the
net FII inflows into the country. The model specification will include a short past history
of the variables over different periods, like a week or fortnight. It means that chosen
timeframe depends on the research and the method, which could represent the global
picture of the investigation. Sometimes on the one hand, it is better to consider day-periods,
it gives data that are more accurate but on the other hand, monthly data gives less
observations but could be useful in terms of complicated political situation in the country.

Political and economic events in Russia, which also will be taken into account in my Thesis,
were explored by Jochum, Kirchgässner and Platek (1998) for Central & Eastern Europe
(CEE) economies (Hungary, Poland and the Czech Republic) and as the outcome authors
pointed out the importance of political and economic events in Russia for CEE economies.
Moreover, Hayo and Kutan (2004) analyzed the impact of US stock returns on Russian
stock and bond markets (along with other factors such as oil prices and political news),
within a GARCH framework.

Last but not at least, there are different method and approaches of resolving the stock
market comovement. However, some approaches are impractical because the stock price
data are highdimensional data and the changes in the stock price usually occur with shift,
which makes the categorization more complex. This fact was considered by Saeed
Aghabozorgi and Ying Wah The (2013). Ritesh Jayantibhai Patel (2017) examined 14
stock market indexes and the outcome of the test indicated that there was a long run
relationship among selected stock markets. From the article
«Forecasting integrated stock markets using international co-movement» Taylor & Francis
(2001) are describing Lee and Kim’s (1994) approach which contains the effect of the event
of October 1987-crash on the co-movements among national stock markets. They described
the price movements in different stock markets using correlation and explanatory factor
analysis and information of 12 different stock market indexes. Via this data the study
showed that the national stock markets became more unrelated after the crash and the co-
movement of national stock markets was strengthening for a long run (Taylor and Francis,
2001).

Not one book was written due to the problem of crises and thus its impact on the financial
market. Should investors take into account last politician events while they are doing their
investments or not? Like the book «Global stock market integration» written by Asma
Mobarek and Sabur Mollah (2016) presents an in-depth critical analysis of existed and
emerging markets and their efficiency through global financial crisis. For the best of my
belief, there are no profound studies on co-movement between Russian and foreign equity
markets during the crisis that is being considered to deal with. In this thesis it is important
to fill the existing gap by performing analysis of stock co-movements on the largest
financial market among former Soviet Union countries, namely Russia and other powerful
countries.
Understanding of the essential mechanisms under the sanctions which were initiated by
Crimean crisis is the growing importance due to the country’s strategic goal to compete
with leading financial centers in the world and the future opportunity for investors to invest
in it. Therefore, this study is meant to supplement the existing knowledge about all the
financial markets, the major indexes and their indicators before and after the Crimean crisis.

France's response to the Ukraine crisis has been more active and more determined than
many would have predicted, but with ongoing operations in Africa and the Middle East, it
should be careful not to overstretch itself. Paris also supported the EU’s policy on
sanctions, suspended its annual bilateral strategic meetings with Moscow and cancelled the
delivery of its Mistral warships to Russia. In other words, France’s responses will be more
influenced by the EU context and by broader trends in its own foreign policy rather than
by Russia’s actions in the Eastern neighborhood.

Firstly, France has responded to an international environment characterised by structural

instabilities and growing US strategic disengagement by pursing a more activist and
interventionist foreign policy. Secondly, French policies towards Russia have been
increasingly “Europeanised”. (David Cadier, Russia 2030: potential impact on French
policies 15th July (2016) France’s membership of the EU and its bilateral relationship with
Germany plays a key role in the formulation of its foreign policy strategy towards Russia.
France is also the number one foreign employer in Russia. Emmanuel Macron and Vladimir
Putin have paid attention to those trends and have discussed them publicly over recent
months. Humanitarian cooperation is also an important component in the bilateral relations.
French and Russian universities offer a large number of double majors.

Many French students go to Russia. Cooperation in the tourism sector is growing rapidly,
with France being more popular among Russian tourists than vice versa. Russian imports
included chemical products (32.05% of total imports); machinery, equipment and vehicles
(26.57%); food and agricultural raw materials (7.63%); metals and metal products (2.48%);
wood and pulp and paper products (0.99%) At the same time, Russian exports decreased
by 16.4% and amounted to 4.8 billion dollars. Among the largest French investors are such
companies as Auchan (retail), Saint Gobain (building materials), air Liquide (chemical
industry), Schneider electric (machinery and power), Lafarge, Vinci (construction),
"EADS", "Thales Alenia space", "SAFRAN" (aerospace industry). JSC "Russian
Railways" are the owners of 75% of shares of logistic company "GEFCO", Novolipetsk
steel owns steel production in Strasbourg. Russian companies also invest in traditional
French products — champagne or cognac (ria.ru)
Chapter 4. Data and Methodology

4.0 Introduction

This chapter describes the data and methodology used in this study. This study uses
publicly available information on stock market index returns and employs the regression
analysis methodology to investigate the effect of stock market co-movements between
Russian and international indices. This chapter proceeds as follows. First,

4.1 Data of the study

To investigate stock co-movements between Russian and international stocks, the data for
key international indices: S&P500, CAC40, DAX, NIKKEI 225 and FTSE 100 was used.
The data covers the period of 10 years from 2009 to 2019 and represents average values of
each index during each month. For several reasons, in contrast to other previous research
on stock co-movements, this study uses monthly rather than daily data. First, unlike many
other studies with shorter investigation period this study uses a time period of 10 years,
which is long enough to generate sufficient number of observations for reliable statistical
analysis.

Second, the Crimea Crisis escalated and developed over a long period of time – more than
half a year, with many events not having immediate reflection in the press. Thus, monthly
data points are considered suitable for the studied topic, then daily data points, which could
fail to reflect the necessary crisis impact in a timely manner. To fulfil the objectives of the
research this study uses monthly historical time series data on changes in stock index values
over the period of 2009-2019. The statistics on index values were collected from publicly
available sources, such as moex.com and Yahoo Finance.

4.2 Methodology

This study then applies regression model methodology to find out significant relationships
between changes in Russian and international stock indices. Correlation analysis is also
being used as supplementary methods to answer the empirical questions of this study. The
study has used OLS regressions. The tests applied on the data are explained as follows,
Unite root

It is the state of data, when the time series data is not stationary over time and stochastic
trend exist in the data, for which this study has used eveiws software to detect and most of
the variable other than one index of foreign were all stationary at level. the method is, first
the data is checked if the problem exists in the data than the difference is applied to remove
the stochastic trend and to make the data stationary. The test results can be interpreted upon
the p value if the 5 value is less than 0.05 it means the data is stationary and if the it is
greater than 0.05 let’s say it is 0.99 etc. in this case the data is not stationary on level and
you have check it on further differences. The other way of the data treatment in this case is
to take log on the variables data and the series will be stationary.

LM Test

This test is used for the detection of autocorrelation in the data, when the data is explained
by the last years or previous unite effects, In the presence of serial correlation in data, the
OLS estimators of the model are unbiased in finite samples size. It can cause many issues
in the model estimates, however to remove the process of first difference is used and most
of the variables are often stationary and not autocorrelated on first difference.

Heteroscedasticity test

This is important to check in the data that error term of the data is in a constant variance,
otherwise the problem will arise in the estimate reliability and validity. The estimates of
the model will not be BLUE if this issue is inside the data.

Best Linear Unbiased Estimate,

The estimate or parameter of the model which is free of these all the Hetro, auto and other
econometric issues, and these estimates are trust worthy to interpret for the importance of
policy

Normality test

The data is check if the data is normally distributed or not, because it is one of the
assumptions that the data should be normally distributed for OLS estimate to be unbiased
and best linear in nature.
 4.2.1 Correlation analysis
This analysis shows the association between MOEX and other indices if the value is
positive it shows positive relation and if the value is negative it shows negative association.
The main result of a correlation is called the correlation coefficient. It ranges from -1.0 to
+1.0. The closer r is to +1 or -1, the more closely the two variables are related.

If correlation coefficient is close to 0, it means there is no relationship between the

variables. If r is positive, it means that as one variable gets larger the other gets larger. If
correlation coefficient is negative it means that as one gets larger, the other gets smaller
(often called an "inverse" correlation between the variables.

4.2.2 Linear regressions Model for the study

Y= f β0+ β1+ β2+et

Where y is RTS

Beta zero is slop of regression

Beta one is external index

Beta 2 is dummy of Crises

The same model is used for RTS with each external index and dummy crises first.

Y= f β0+ β1+ β2+et

Where,

Y is the MOEX index of Russia

Beta zero is slop of regression

Beta one is external index

Beta 2 is dummy of Crises

The same model is used for MOEX 5 times with each external index and dummy crises
first.

Crises period is defined from 2014 to 2017 according different sources of Russia and other world.
Chapter 5 Results and discussion
5.0 Introduction
This chapter is composed of 2 major parts and multiple subsections in each part of the data
analysis, major part (a) is compiled of data rang and trends from different stock indices. In
order to get a better understanding-comprehension of the Russian economic activity, so far
five different stock indices are studied in simultaneous featuring: CAC 40, DAX, FTSE
100, Nikkei 225, S&P 500. Despite of the good correlation of foreign indices, the Russian
stock indices did suffer alterations due to the Crimea circumstances. This chapter includes
the results data trends and the diagnostic test conducted on data including the test of
heteroscedasticity, autocorrelation and some other important checks on data before final
results.

5.1 Descriptive statistics section (a)

To illustrate this idea the Graph 1 was done below.

Graph 1: Evolution of the indices MOEX and RTS during 2009 − 2019. [inv19].

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

At a first glance, the RTS index experienced a notorious decay. The blue curve reveals that
the Russian activity after 2014 experienced a reduction of 50% compared to the peak value
achieved in 2011. In the same fashion, the Figure 1 expresses the red curve with the
increasing trend of local market, even after Crimea accident. In terms of economical
labeling, the Russian market has experienced a reduction of foreign activities and the
increasing of the domestic economy. In other words, Russia is on a path to become a self-
sustained economy.
5.1 MOEX
The MOEX Russia Index, established on 22 September 1997, is the primary index in
Russia, which acts as a benchmark of the Russian stock market. In contrast to many
international indices, such as Nikkei 225 and S&P 500, the number of component stocks
in the index is not fixed and can vary depending on stock liquidity and trading frequency.
The first-level criteria for inclusion in the index is the liquidity factor, which is calculated
as the ratio of the annual trading volume to the market capitalization adjusted for free float
and is reviewed quarterly. To be included into the index, a minimum liquidity factor of
15% should be obtained. Since it is denominated in rubles, domestic investors prefer the
MOEX Russia Index, while foreign investors mostly commonly choose the RTS index.

The dynamics of the index is presented on Graph 2. As can be seen from the graph, shortly
after the Crimea crisis and over the period of 2014 and 2015 the index values did not rise
above 1700 points. This suggests that, fundamentally, the stocks comprising the index have
good current and future financial prospects, yet the external political situation did not let
them rise beyond the 1700 point threshold in 2014-2015. Only after the ease of the
sanctions in 2016 the MOEX index started rising again and reached 2500 points by the end
of 2018.

Graph 2. MOEX Index, 2009-2018

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5.2 RTS
The RTS is another major Russian stock market index. However, unlike the MOEX, it is
denominated in dollars, and hence is susceptible to foreign exchange fluctuations. Thus,
the index co-movements can sometimes be opposite, since MOEX gains from the
devaluation of Ruble, while the RTS falls when the Russian currency devaluates. This
makes RTS index positively correlated with the USD/RUB exchange rate.

Since January 2014, the ruble has lost almost 40% of its value against the dollar due to
falling oil prices, sanctions imposed by the US and EU and the dramatic pressure on
Russian budget on behalf of the newly joined region of Crimea. The RTS index too, has
seen a sharp decline at the beginning of 2014, which can be seen on Graph 3. Unlike the
MOEX, which due to strong fundamental performance of the underlying companies, has
managed to restore to pre-crisis levels, the RTS index remains relatively low even
nowadays.

The RTS index, calculated in dollars, has experienced a permanent decline since 2011,
when it reached 2,134.23 points. Economists distinguish several reasons: the ongoing
ousting of domestic companies from the global market; the replacement of dollar currency
in international payments; activation of trade in the pair "ruble-yuan" and the
transformation of the ruble into the reserve currency of trade in the CIS.

Graph 3. RTS index, 2009-2018

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5.3 S&P 500

The attractiveness of the S&P 500 securities is due to the fact that the listing includes stocks
from all sectors of the US economy that most objectively reflect the state of different
markets. Total capitalization reaches approximately eleven trillion dollars. Currently, the
largest share of the index (22.3%) is occupied by the financial companies, 15% of the index
is occupied by the companies in the information technology sector, 10% by the industrial
companies and other sectors, which are represented in various small fractions:
Chart 1. Share of group members of S&P 500

The major companies included to S&P index are Apple, Microsoft, Amazon, Facebook,
ExxonMobil, Johnson & Johnson, Berkshire Hathaway, JPMorgan Chase, Alphabet (or in
other words - Google).

The main evaluation criterion of the S&P 500 index is capitalization. The index is calculated
according to the market capitalization of companies that are included in the S & P 500. This
means that companies with higher market capitalization will have larger impact on the
formation of the final index value. To be included in the S&P 500, an enterprise must meet
several criteria. Today's minimum capitalization is set 6.1 billion dollars. The minimum
stock turnover should not be less than 250,000 shares per month.

From 2009 to 2018 year S&P 500 has been growing right alone, it means that companies
included to this index represent a good financial position and stability. For instance, on June
6, 2016, the S&P500 index reached its maximum since the beginning of 2016. The main
facilitator was the speech of the head of Federal Reserve System in Philadelphia, when Janet
Yellen said that rates would rise gradually through the background of strong
macroeconomic data. On the other hand, there is a price correction – recession. The biggest
one happened after the announcement of the results of Brexit, US stock indices fell and thus
lost in value 3.3%.
Graph 4. S&P 500, 2009-2018

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5.4 FTSE 100

FTSE 100 - Financial Times Stock Exchange - is the key index of London Stock Exchange.
Along with other indices such as Dow Jones, S&P 500, NASDAQ and Nikkei 225, this
index forms the "big five" of the fundamental indicators of the world economy.

The fair reputation of this index is due to the high requirements for the companies, which
are included in it. According to the official website, it can include companies that meet the
following requirements:

 Present on the London Stock Exchange.

 Has an exact stock price, which is reflected either in euros or in British pounds (even
after the UK’s exit from the EU, this norm should not change).
 A company does not hide information about its directors (the basic financial
information is public, not hidden).
 Shares must be liquid and they are in free float.

Initially this index took a high position on the Stock Exchange and for all its existence did
not have deep drawdowns without subsequent growth. Therefore, as an investment tool, it
is a very persistent asset owned by almost every major investor all over the world. It
includes 100 companies; some of them are Ashtead Group, Capita, GKN, Rolls-Royce,
Holdings RR, HSBA.
Graph 5. FTSE 100, 2009-2018
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5.5 CAC 40
The CAC 40 stock index - Cotation Assistee en Continu – is the most important financial
indicator of France, which determines the financial sustainability of the 40 largest
enterprises, demonstrating the macroeconomic situation in Western Europe.
Among CAC 40 participants there are three banks: BNP Paribas, Credit Agricole, Societe
Generale. In addition, there are aviation-defense complex, auto-building concerns and
companies that sell luxury goods. The giants among them are Airbus Group, ArcelorMittal,
PSA Peugeot Citroen, Renault, LʻOreal, Danone, Valeo.

Chart 2. Share of group members of CAC 40

Considering that, the CAC 40 is the second most significant index in the European Union
(EU), futures as the instrument has a substantial meaning. Firstly, it helps to protect
investor’s money from consequences.
  Dollar rate. The EU business is focused on America.
 A wave of social upheaval. Europe has been the scene of numerous strikes for human
rights, so new strikes have a devastating effect on the economy.
 Sanctions. The European Union could have traded with Russia and the Middle East,
but disagreements prevent the creation of partnerships.
Secondly, investor interest in regional economies within the European Union creates the
necessary amount of liquidity and flexibility, which allows using technical analysis for
analytics and implementing specific speculative trading strategies.
For many years, derivatives have been an extremely convenient tool for hedging risks, short-
term speculation on the difference in rates and long-term strategies of conservative retention
in a portfolio of composite indicators.

Graph 6. CAC 40, 2009-2018

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4000.00

3000.00

2000.00 CAC40

1000.00

0.00

5.6 DAX
The DAX stock index is a key German stock index that is traded on the Frankfurt Stock
Exchange. According to European traditions, the index is not numerous; there are only 30
participants.

When it comes to companies, there are only two banks - Commerzbank and Deutsche Bank,
three insurance companies - Allianz, Hannover RE and Munich RE. Car manufacturers just
four - BMW AG, Daimler AG, MAN AG and VAG AG. From "stars" - Adidas, Metro,
Siemens, BASF, Deutsche Lufthansa. The constant participant of the rating, Deutsche Börse
AG is the owner of the Frankfurt stock exchange and, in fact, the DAX operator plays an
important role.

German DAX shows the overall dynamics of the European market, therefore, the factors,
which affect the index, are global:

 Companies’ report. When enterprises publish the financial statement of a quarter or

of a year, the price of their shares fluctuates.
 Political situation. If some countries are in conflict with each other, it is always has
a huge impact on the economy.
 Economic bubble. The "bubble" bursts equal to the decrease in market growth
prospects.
 Interest rates in the US. The Federal reserve system of the USA controls how
expensive for the company takes a loan from the bank.

Currently, the German DAX index is one of the most respected as well as the most flexible
index in the world. The measurement methodology and criteria for participation change
regularly, which does not prevent the indicator from being heavily dependent on the
European, American and Asian financial situation. Since its inception, it has shown
moderate growth with its ups and downs. Mostly all participants are in the manufacturing
sector. Germany's economy is the first in Europe and the fourth in the world.

Graph 7. DAX, 2009-2018

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8000.00

6000.00
DAX
4000.00

2000.00

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5.7 Nikkei 225

The Nikkei includes 225 largest companies in Japan and in terms of diversification; the
index is considered to be the best in the world. In total, there are 35 sectors; the most
powerful is estimated to be electronics. The chemical developed sector is about 18
companies, mechanical engineering - 16, furthermore, there are 11 banks and 9 companies
producing cars. The most well known companies are Japan Tobacco, Kikkoman, Kirin
Brewery, The Chiba Bank, Chuo Mitsui Trust Holdings, Hitachi, Kyocera, Panasonic.

Chart 1. Share of group members of Nikkei 225

While people all over the world met the New Year of 1990, the Nikkei 225 flew down with
the sharp decreasing. For nine years, while Japan showed an increase in industrial
production, the index showed an increasing decline. In 2011, after the earthquake near
Fukushima, it fell by 10%. The long-awaited revival began in 2013, but after that hit, the
crisis in Asia, where the assembly plants of many Japanese companies are located at the
beginning of 2016, was met by fall in less than three weeks.

Working with this index will be motivating for traders who play for a decline in equity
prices, as well as for those who associate the risk with high technology. Along with the
NASDAQ, the Nikkei 225 became a platform for growing a large number of hi-tech
companies and investments in it.
Graph 8. Nikkei 225, 2009-2018
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10000.00 Nikkei 225

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5.2 Diagnostic test on data before empirical estimation

5.2.1 table 5.1 Unite root test ADF results

Variable name t-Statistics P value R square

CAC40 -11.09290 0.0000 0.516913

DAX -9.091255 0.0000 0.514500

CRCD -4.366274 0.0153 0.463720

D(FSE100) -12.65865 0.0000 0.582815

MOEX -10.80171 0.0000 0.503619

NIKKEI -10.52580 0.0000 0.490683

RTS -10.26040 0.0000 0.477927

SP500 -12.32783 0.0000 0.569249

Interpretations of ADF

The results in table 5.1 show, that the data is stationary at level, where the p value is less
than 0.05, which indicates the null hypothesis is rejected thus we accept the alternative
hypothesis that the data doesn’t has unite root. This allows us to estimate the equation
through OLS which has the assumption and the assumption is fulfilled after checking the
issue and the data free of this issue, which can be also seen in normality test of the data.

5.2.2 table 5.2 Autocorrelation test results

Variable name Durbin-Watson stat F statistics

CAC40 2.014705 123.0525

DAX 1.952636 58.4749

CRCDUMMY 1.917832 59.2333

D(FSE100) 1.992286 160.2415

MOEX 1.909884 116.6770

NEKKI 1.985327 110.7925

RTS 1.857580 105.2758

SP500 1.988338 151.9754

Interpretation Durbin Watson results

The result of table 5.2 shows the results of Durbin Watson which can be interpreted as if
the value is above 2, it means positive autocorrelation in data and if the value is less than
2, it means that there is negative autocorrelation in the data. And the f statistics shows the
association is statistically significant. The value of durbin value ranges from 0-4, when it
is 2 it means there no autocorrelation in the data. In our case there exist autocorrelation in
the data that’s the reason. The results shown in the above table shows that, other than
CAC40 every indices of the study is negative autocorrelation existing in the data. This
means that these indices are declining due to it past trend of crises effects or some short
terms crises on stocks. However, it is confirmed that the data is autocorrelation with
minimum extend which might not be significant in LM serial correlation test. But Durban
watson values shows that there is auto correlation or the lag effect in the data.

this study has used White heteroskedasticity-consistent standard errors & covariance
because the data has the heteroscedastic in some cases.

5.2.3 Normality Test of the Data.

CAC40 Histogram
14
Series: CAC40
12 Sample 1 118
Observations 118
10
Mean 0.005268
Median 0.005133
8
Maximum 0.099291
Minimum -0.113269
6
Std. Dev. 0.044209
Skewness -0.193295
4 Kurtosis 2.451230

2 Jarque-Bera 2.215454
Probability 0.330309
0
-0.10 -0.05 0.00 0.05 0.10

DAX HISTOGRAM
12
Series: DAX
Sample 1 118
10
Observations 118

8 Mean 0.008631
Median 0.010741
Maximum 0.123152
6
Minimum -0.191921
Std. Dev. 0.047532
4 Skewness -0.465206
Kurtosis 4.737249
2
Jarque-Bera 19.09486
Probability 0.000071
0
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10
FTSE100HISTOGRAM
12
Series: FTSE100
Sample 1 118
10
Observations 118

8 Mean 0.004937
Median 0.007954
Maximum 0.084522
6
Minimum -0.072662
Std. Dev. 0.034734
4 Skewness -0.028128
Kurtosis 2.637173
2
Jarque-Bera 0.662807
Probability 0.717916
0
-0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08

MOEX HISTOGRAM
16
Series: MOEX
14 Sample 1 118
Observations 118
12
Mean 0.011605
10 Median 0.012520
Maximum 0.220583
8
Minimum -0.135170
Std. Dev. 0.056350
6
Skewness 0.472004
4 Kurtosis 4.964957

2 Jarque-Bera 23.36502
Probability 0.000008
0
-0.10 -0.05 0.00 0.05 0.10 0.15 0.20
NIKKE HISTOGRAM

16
Series: NIKKEI
14 Sample 1 118
Observations 118
12
Mean 0.008839
10 Median 0.012958
Maximum 0.128499
8
Minimum -0.116546
Std. Dev. 0.051360
6
Skewness -0.298743
4 Kurtosis 2.908142

2 Jarque-Bera 1.796687
Probability 0.407244
0
-0.10 -0.05 0.00 0.05 0.10

RTS HISTROGRAM

20
Series: RTS
Sample 1 118
16 Observations 118

Mean 0.006288
12 Median 0.001826
Maximum 0.305834
Minimum -0.220544
8 Std. Dev. 0.081724
Skewness 0.333503
Kurtosis 4.383147
4
Jarque-Bera 11.59346
Probability 0.003037
0
-0.2 -0.1 0.0 0.1 0.2 0.3

SP500 HISTOGRAM

20
Series: SP500
Sample 1 118
16 Observations 118

Mean 0.010525
12 Median 0.013678
Maximum 0.107723
Minimum -0.091777
8 Std. Dev. 0.036088
Skewness -0.317482
Kurtosis 3.459662
4
Jarque-Bera 3.021142
Probability 0.220784
0
-0.10 -0.05 0.00 0.05 0.10
 Interpretations

The distribution of the data shows, that most of the data is normally distributed and is fit for
further estimation in terms applying OLS regression to check the association between the
variables of the study.

5.2.4 Table 5.3 Correlation results

CAC40 CRCDUMM DAX FTSE100 MOEX NIKKEI RTS SP500

Y
CAC40 1 - 0.8707480610 0.7905723304 - 0.6060047463 0.4966644470 0.7409405064
0.0399743690 556107 91751 0.1324550526 50375 963326 075042
9183612 547951
CRCDUMM - 1 - - - - - -
Y 0.0399743690 0.0425417451 0.0671530492 0.0455961266 0.0154920975 0.2155942628 0.0116524924
9183612 3640415 9532125 1638606 8933381 434717 6602732
DAX 0.8707480610 - 1 0.7102768091 - 0.6279435787 0.4733858570 0.7220765887
556107 0.0425417451 336811 0.1095740367 593759 367291 054574
3640415 745089
FTSE100 0.7905723304 - 0.7102768091 1 - 0.4551739597 0.5175218902 0.7491272478
91751 0.0671530492 336811 0.1176218231 549243 044053 647978
9532125 130167
MOEX - - - - 1 0.0231737486 0.1183043022 -
0.1324550526 0.0455961266 0.1095740367 0.1176218231 1554218 231454 0.0471968282
547951 1638606 745089 130167 9663726
NIKKEI 0.6060047463 - 0.6279435787 0.4551739597 0.0231737486 1 0.3553041953 0.6066192427
50375 0.0154920975 593759 549243 1554218 742955 688482
8933381
RTS 0.4966644470 - 0.4733858570 0.5175218902 0.1183043022 0.3553041953 1 0.5839297790
963326 0.2155942628 367291 044053 231454 742955 504619
434717
SP500 0.7409405064 - 0.7220765887 0.7491272478 - 0.6066192427 0.5839297790 1
075042 0.0116524924 054574 647978 0.0471968282 688482 504619
6602732 9663726

Interpretation of correlation

The results show that there is significant correlation between RTS and CAC40, NIKKEI,
SP500 AND FTSE100. The results show that RTS is positive associated with Cac40 and
negatively correlated with these other indices of other countries and has also negative
relation with crimea in Russia. Due to crises of Crimea Iit has negatively and significantly
declined the returns of Russia MOEX and RTS. Both the indices have negatively affected
with other countries indices growth due to crime crises. One along the diagonal shows
significant correlation exist.
Empirical Results Section One Regression of RTS CAC40 AND
CR-Dummy
Table no 5.4
Dependent Variable: RTS
Method: Least Squares
Date: 04/21/19 Time: 21:38
Sample: 1 118
Included observations: 118

Variable Coefficient Std. Error t-Statistic Prob.

C 0.006896 0.006824 1.010593 0.3143

CAC40 0.903632 0.145872 6.194691 0.0000
CRCDUMMY -0.052786 0.021246 -2.484501 0.0144

R-squared 0.285051 Mean dependent var 0.006288

Adjusted R-squared 0.272617 S.D. dependent var 0.081724
S.E. of regression 0.069700 Akaike info criterion -2.464145
Sum squared resid 0.558677 Schwarz criterion -2.393703
Log likelihood 148.3845 Hannan-Quinn criter. -2.435543
F-statistic 22.92534 Durbin-Watson stat 2.002624
Prob(F-statistic) 0.000000

The results in table 5.4 shows that the major Indices of Russia RTS is positively associated
with CAC40 index growth, which means that increase in CAC40 will lead to the growth of
RTS index in Russia and this index has been negatively affected during crises. The RTs
declining since 2009 but somehow it was good enough till the last days of 2013 but in 2014
the total trend shifted downwards to last days of 2017.

And the CAC40 has shown growth from start to the end of 2018 and in 2019 it is still
growth and the trend is positive. The P value shows that the relationship statistically
significant, which is less than 0.05 and model is good with .28 percent variation explained
by the selected variable of external index CAC40 and the crises variable CRC Dummy. And
there is no autocorrelation in this set of variables as the value of DAURBIN Watson is
almost equal to 2. In this case the lag effect doesn’t exist.
RTS DAX REGRESSIONS table no 5.5

Dependent Variable: RTS

Method: Least Squares
Date: 04/21/19 Time: 21:53
Sample: 1 118
Included observations: 118

Variable Coefficient Std. Error t-Statistic Prob.

C 0.004748 0.006995 0.678819 0.4986

DAX 0.799585 0.137824 5.801499 0.0000
CRCDUMMY -0.052720 0.021583 -2.442699 0.0161

R-squared 0.262366 Mean dependent var 0.006288

Adjusted R-squared 0.249538 S.D. dependent var 0.081724
S.E. of regression 0.070797 Akaike info criterion -2.432908
Sum squared resid 0.576403 Schwarz criterion -2.362467
Log likelihood 146.5416 Hannan-Quinn criter. -2.404307
F-statistic 20.45197 Durbin-Watson stat 2.007767
Prob(F-statistic) 0.000000

Interpretations

The results of the study in table no 5.5 shows that Dax is positively influencing the RTS in
Russia and the Crises has negatively influenced the RTS index. The association between
the variables is statistically significant. Because the value of p shows that the null hypothesis
is accepted, which means we can conclude that there is association between RTS and DAX
and crises.

The model is good fit with r square value of .262366. this indicates that the variation in
dependent variable is explained by the selected independent variable, with no
autocorrelation significant and F statistics shows that the association between these variable
in this equation is significant.
Table 5.6 RTS NIKKEI AND CRDUMMY REGRESSIONS

Dependent Variable: RTS

Method: Least Squares
Date: 04/21/19 Time: 21:55
Sample: 1 118
Included observations: 118
White heteroskedasticity-consistent standard errors & covariance

Variable Coefficient Std. Error t-Statistic Prob.

C 0.007090 0.007212 0.983061 0.3276

NIKKEI 0.560180 0.140703 3.981280 0.0001
CRCDUMMY -0.056578 0.023349 -2.423106 0.0169

R-squared 0.170389 Mean dependent var 0.006288

Adjusted R-squared 0.155961 S.D. dependent var 0.081724
S.E. of regression 0.075081 Akaike info criterion -2.315399
Sum squared resid 0.648276 Schwarz criterion -2.244958
Log likelihood 139.6085 Hannan-Quinn criter. -2.286798
F-statistic 11.80963 Durbin-Watson stat 1.988578
Prob(F-statistic) 0.000022 Wald F-statistic 11.57842
Prob(Wald F-statistic) 0.000026

Interpretation

The results of the study show that, the change in External index will lead to bring the
positive change in the RTS index of Russia but the effect of Crcdummy, which crises period
is negative, this indicates that crises has negatively affected the RTS of Russian economic
activities. This catastrophe has drastically pretentious the Russian economy, both the
consumers side and most important the companies also the local and county financial
markets. The Russian stock market in particular has experienced large declines, with a 30%
drop in the RTS Index from the beginning of December through 16 December 2014. The
results are significant statistically as the value of P is less than 0.05 or the value of t stats
are higher than 2 and the Rsquare value of the model is 17 with almost 2 value of Durbin
Watson test. This reflects the data is clear of auto serial correlation.

Table 5.7 RTS FTSE100 AND CRDUMMY REGRESSION

Dependent Variable: RTS

Method: Least Squares
Date: 04/21/19 Time: 21:56
Sample: 1 118
Included observations: 118
White heteroskedasticity-consistent standard errors & covariance

Variable Coefficient Std. Error t-Statistic Prob.

C 0.005392 0.006453 0.835620 0.4051

FTSE100 1.188935 0.190158 6.252365 0.0000
CRCDUMMY -0.048910 0.023394 -2.090719 0.0388

R-squared 0.300681 Mean dependent var 0.006288

Adjusted R-squared 0.288518 S.D. dependent var 0.081724
S.E. of regression 0.068934 Akaike info criterion -2.486248
Sum squared resid 0.546464 Schwarz criterion -2.415807
Log likelihood 149.6886 Hannan-Quinn criter. -2.457647
F-statistic 24.72280 Durbin-Watson stat 1.976941
Prob(F-statistic) 0.000000 Wald F-statistic 21.98725
Prob(Wald F-statistic) 0.000000

Interpretation

The results of the study shown in table 5.7 shows that RTS is negatively affected due to
crises and During the financial crisis, the economy turned to prevalent the state ownership
with 60% of productive assets in the hands of the government. By 2016, the Russian
economy rebounded with 0.3% GDP growth and was officially out of the recession. In
January 2017, Russia had foreign currency reserves of around $391 billion, an inflation rate
of 5.0% and interest rate of 10.0%. RTS has positively association with foreign index. The
association is positively significant with low value of P and higher value of t stats. The
study results show that R square is 30 percent, which means that variation in dependent
variable is 30 percent explained by the selected variables of the study.

Table 5.8 RTS SP500 AND CRDUMMY REGRESSION

Dependent Variable: RTS

Method: Least Squares
Date: 04/21/19 Time: 21:58
Sample: 1 118
Included observations: 118
White heteroskedasticity-consistent standard errors & covariance

Variable Coefficient Std. Error t-Statistic Prob.

C -0.001854 0.006315 -0.293607 0.7696

SP500 1.316854 0.168123 7.832658 0.0000
CRCDUMMY -0.056222 0.020830 -2.699153 0.0080

R-squared 0.384573 Mean dependent var 0.006288

Adjusted R-squared 0.373870 S.D. dependent var 0.081724
S.E. of regression 0.064667 Akaike info criterion -2.614039
Sum squared resid 0.480908 Schwarz criterion -2.543598
Log likelihood 157.2283 Hannan-Quinn criter. -2.585438
F-statistic 35.93109 Durbin-Watson stat 1.890912
Prob(F-statistic) 0.000000 Wald F-statistic 34.71502
Prob(Wald F-statistic) 0.000000

The results in table 5.8 show that there is a positive effect of foreign index sp500 movement
on internal RTS of Russia and the association is significant statistically as the value of p is
less than the standard rang for rejection of hypothesis, so we accept that there is significant
relation between RTS Index and foreign index.

The results also show that there is negative autocorrelation in the series, which means past
value are restriction the index from growth and the crisis has significant implications for
almost all the sets test with RTS.
Empirical results section two dependent MOEX

Table 5.9 REGRESSION FOR MOEX CAC40 AND CR-DUMMY

Dependent Variable: MOEX

Method: Least Squares
Date: 04/21/19 Time: 22:10
Sample: 1 118
Included observations: 118
White heteroskedasticity-consistent standard errors & covariance

Variable Coefficient Std. Error t-Statistic Prob.

C 0.013470 0.005483 2.456877 0.0155

CAC40 -0.171428 0.143346 -1.195903 0.2342
CRCDUMMY -0.009463 0.013851 -0.683171 0.4959

R-squared 0.020138 Mean dependent var 0.011605

Adjusted R-squared 0.003097 S.D. dependent var 0.056350
S.E. of regression 0.056263 Akaike info criterion -2.892466
Sum squared resid 0.364035 Schwarz criterion -2.822025
Log likelihood 173.6555 Hannan-Quinn criter. -2.863865
F-statistic 1.181755 Durbin-Watson stat 1.886640
Prob(F-statistic) 0.310437 Wald F-statistic 0.937932
Prob(Wald F-statistic) 0.394410

Interpretation

The results in table 5.9 show that the MOEX index of Russia is not affected due to external
indices and also it doesn’t show any relationship with CRC-Dummy for before, during and
after crisis situation. The value of Durban Watson shows autocorrelation exist in the data
and which means that the MOEX index might be statistically explained by the past trend of
the stock market and demand for stock has remained lower in past which effects ii shows
negative autocorrelation in the data.
TABLE 5.10 REGRESSION FOR MOEX DAX AND CR-DUMMY

Dependent Variable: MOEX

Method: Least Squares
Date: 04/21/19 Time: 22:11
Sample: 1 118
Included observations: 118
White heteroskedasticity-consistent standard errors & covariance

Variable Coefficient Std. Error t-Statistic Prob.

C 0.013699 0.005430 2.522674 0.0130

DAX -0.132441 0.121116 -1.093506 0.2765
CRCDUMMY -0.009347 0.014294 -0.653905 0.5145

R-squared 0.014537 Mean dependent var 0.011605

Adjusted R-squared -0.002602 S.D. dependent var 0.056350
S.E. of regression 0.056424 Akaike info criterion -2.886766
Sum squared resid 0.366116 Schwarz criterion -2.816325
Log likelihood 173.3192 Hannan-Quinn criter. -2.858165
F-statistic 0.848201 Durbin-Watson stat 1.899919
Prob(F-statistic) 0.430846 Wald F-statistic 0.807213
Prob(Wald F-statistic) 0.448611

INTERPRETATION

The results of the study show that MOEX has no significant association with DAX and
CRC-DUMMY. Which means that neither external index and nor the crisis has affected the
growth of MOEX in Russia. This index has strongly association with some other variable
reflected by the significance of Constant in the model. The results indicate that MOEX
index has remained growing even in the times of crisis. The stock market has survived and
has no association with other stock markets.
TABLE 5.11 REGRESSION FOR MOEX FTSE100 AND CR-DUMMY

Dependent Variable: MOEX

Method: Least Squares
Date: 04/21/19 Time: 22:12
Sample: 1 118
Included observations: 118
White heteroskedasticity-consistent standard errors & covariance

Variable Coefficient Std. Error t-Statistic Prob.

C 0.013591 0.005578 2.436606 0.0164

FTSE100 -0.196674 0.180728 -1.088234 0.2788
CRCDUMMY -0.009976 0.014065 -0.709298 0.4796

R-squared 0.016710 Mean dependent var 0.011605

Adjusted R-squared -0.000391 S.D. dependent var 0.056350
S.E. of regression 0.056361 Akaike info criterion -2.888973
Sum squared resid 0.365309 Schwarz criterion -2.818532
Log likelihood 173.4494 Hannan-Quinn criter. -2.860372
F-statistic 0.977126 Durbin-Watson stat 1.901703
Prob(F-statistic) 0.379494 Wald F-statistic 0.777120
Prob(Wald F-statistic) 0.462127

Interpretation

The results of table 5.11 shows that there is no association between external index and the
MOEX co movement. Which also means they doesn’t move together and the relationship
between crises and MOEX is also not significant in our case, this indicates that MOEX is
remained unaffected during crisis and it has no association with other countries stock index
at all. This indicates that movement of MOEX is not associated with indices movement but
it might be because of other factors, which are not included in the model.
TABLE 5.12 RGERSSION FOR MOEX NIKKEI AND CR-DUMMY

Dependent Variable: MOEX

Method: Least Squares
Date: 04/21/19 Time: 22:14
Sample: 1 118
Included observations: 118
White heteroskedasticity-consistent standard errors & covariance

Variable Coefficient Std. Error t-Statistic Prob.

C 0.012241 0.005360 2.284030 0.0242

NIKKEI 0.024656 0.094175 0.261815 0.7939
CRCDUMMY -0.008400 0.014366 -0.584736 0.5599

R-squared 0.002584 Mean dependent var 0.011605

Adjusted R-squared -0.014762 S.D. dependent var 0.056350
S.E. of regression 0.056765 Akaike info criterion -2.874710
Sum squared resid 0.370556 Schwarz criterion -2.804269
Log likelihood 172.6079 Hannan-Quinn criter. -2.846109
F-statistic 0.148960 Durbin-Watson stat 2.025972
Prob(F-statistic) 0.861770 Wald F-statistic 0.193772
Prob(Wald F-statistic) 0.824114

Interpretations

The results of the study show that MOEX has no significant association with NIKKEI and
CRC-DUMMY. Which means that neither external index and nor the crisis has affected the
growth of MOEX in Russia. This index has strongly association with some other variable
reflected by the significance of Constant in the model.

The results shown in table 5.12 indicates that this MOEX index has remained immune
across all the crisis time and after crises and the study doesn’t reflect and association of
MOEX and external country’s index at all,
Table 5.13 RGERSSION FOR MOEX SP500 AND CR-DUMMY

Dependent Variable: MOEX

Method: Least Squares
Date: 04/21/19 Time: 22:15
Sample: 1 118
Included observations: 118
White heteroskedasticity-consistent standard errors & covariance

Variable Coefficient Std. Error t-Statistic Prob.

C 0.013261 0.005517 2.403680 0.0178

SP500 -0.074537 0.170284 -0.437720 0.6624
CRCDUMMY -0.008568 0.014356 -0.596834 0.5518

R-squared 0.004357 Mean dependent var 0.011605

Adjusted R-squared -0.012958 S.D. dependent var 0.056350
S.E. of regression 0.056714 Akaike info criterion -2.876489
Sum squared resid 0.369898 Schwarz criterion -2.806048
Log likelihood 172.7129 Hannan-Quinn criter. -2.847888
F-statistic 0.251641 Durbin-Watson stat 1.959660
Prob(F-statistic) 0.777951 Wald F-statistic 0.274011
Prob(Wald F-statistic) 0.760819

Interpretation

The results of the study show that the MOEX index doesn’t shows any significant
association with the external index of Sp500 and CRC-DUMMY. Which also means that
there doesn’t exist any relationship between the external index and the Russian MOEX
stock index and most importantly the cremia crisis has not affected the growth of MOEX in
Russia. This index has strongly association with some other variable reflected by the
significance of Constant in the model. The constant of the model is significant, which means
there is a need to further investigation to determine the influencing factors of MOEX index
growth. The results shown in table 5.13 indicates that this MOEX index has remained
immune across all the crisis time and after crises and the study doesn’t reflect and
association of MOEX and external country’s index at all.
CHAPTER 6 CONCLUSION AND POLICY RECOMMENDATIONS

6.1 CONCLUSION

The study has investigated the association between Russia major indices and external
indices with the dummy of crises, RTS is positive associated with Cac40 and correlated
with these other indices of other countries and has also negative relation with crimea in
Russia. Due to crises of Crimea Iit has negatively and significantly declined the returns of
Russia MOEX and RTS.

The study also investigated each and every index with RTS. The study concluded that RTS
is mainly affected negatively due to crisis and the growth of other indices has encourage the
growth RTS but the other major Russian index of MOEX is not affected due to crises and
has not relation with another index at all. The conclude that the major index of MOEX is
quite immune in all the circumstances. The co movement of RTS is associated with other
indices and also with Crises dummy and has most of the time regressed negatively due to
Crises.

The RTS index is mostly dominated by the stocks of oil companies and gas company’s
stocks. It has the tumbled more than 70% in 2008 when investors escaped the market, as oil
prices tumbled, the ruble came under intense selling pressure and Moscow's foreign
exchange reserves declined precipitously. Russia's military conflict with Georgia in August
2008 as well as corporate debt problems and shareholder conflicts also soured investor
sentiment. The stocks still prone to risk due to unprotected policies. The study came to the
conclusion to inform the authorities, the investment is one ways of increasing but trust of
stock exchange is another important option to maintain the market flourishing and thriving.
The crises time on Russia stocks has affected the growth and trend pattern of the stock
market and it is measured that the co-movements of Russian stocks with foreign indices
after the Crimea crisis is negatively associated and most of the other indices doesn’t even
respond. Some structural reforms might be helpful in the situation of crises.
6.2 Policy recommendation

The government should focus on external indices in relation with RTS, which is
comparative smaller than MOEX index in Russia.

The MOEX is dominated with huge amount of dollars nowadays as compared to RTS and
MOEX is quite Immune.

The government should prefer the policy which can bring investors and can support
investors to make permanent investments and regain the loss of stocks during crises. The
policy strategies pursued need not be identical across countries and regions and the required
size of the economic stimulus and the nature of the other measures taken need not – and
should not – be the same, as structural and conjunctural conditions differ. Nevertheless, a
similar orientation and consistency is warranted. immediate priority of macroeconomic
policies and bank support schemes should be promoted in the economy for the purpose of
recovery and to preserve the price and to bring the financial stability in market. Yet, a
fundamental policy objective should be that the recovery of activity and the repair of the
financial system have to be achieved in a manner that will ensure a sustained growth
performance and will prevent the recurrence of episodes of financial imbalances and market
excesses that can threaten again financial stability and economic welfare. Put differently, it
is important that the policies and reforms pursued today lay the foundations for sustained
growth.
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Appendix A

The combined regression for all the indices effects on MOEX

Dependent Variable: MOEX

Method: Robust Least Squares

Date: 04/24/19 Time: 02:40

Sample (adjusted): 4 118

Included observations: 115 after adjustments

Method: M-estimation

M settings: weight=Bisquare, tuning=4.685, scale=MAD (median

centered)

Huber Type I Standard Errors & Covariance

Variable Coefficient Std. Error z-Statistic Prob.

MOEX(-1) -0.031003 0.114286 -0.271276 0.7862

CRCDUMMY -0.004894 0.016044 -0.305014 0.7604

DAX 0.105634 0.227997 0.463311 0.6431

FTSE100 -0.082023 0.277555 -0.295521 0.7676

FTSE100(-1) -0.207752 0.233583 -0.889414 0.3738

FTSE100(-2) 0.343540 0.148886 2.307397 0.0210

FTSE100(-3) 0.230617 0.154720 1.490542 0.1361

NIKKEI 0.109407 0.134933 0.810822 0.4175

SP500 0.291581 0.257472 1.132476 0.2574

SP500(-1) 0.329344 0.221970 1.483730 0.1379

CAC40 -0.500035 0.274029 -1.824753 0.0680

 Robust Statistics

R-squared 0.045504 Adjusted R-squared -0.046274

Rw-squared 0.108143 Adjust Rw-squared 0.108143

Akaike info criterion 135.7064 Schwarz criterion 169.8354

Deviance 0.258853 Scale 0.046908

Rn-squared statistic 14.07977 Prob(Rn-squared stat.) 0.228611

Non-robust Statistics

Mean dependent var 0.011291 S.D. dependent var 0.056821

S.E. of regression 0.056081 Sum squared resid 0.327090

the study has used ARDL to both long and short run and the turning point. The results shows that

in combine regression only ftse100 has effected MOEX significantly 2 years backs as the lag value

is significant at 2 lag. Other varaibles and lag value are insignificant.