Interdependence and portfolio optimisation of bank equity returns from developed and emerging Europe

We examine the spillovers, portfolio allocation, and diversification potential of bank equity portfolios from developed and emerging countries in Europe (henceforth, developed and emerging Europe) using a directional spillover index and nonlinear portfolio optimisation methods. Empirical results indicate that in developed Europe the largest spillover receivers and transmitters are the banks from France and Spain, whereas in emerging Europe are those from Greece and Poland. Cross‐country spillover transmission and reception is larger across banks from developed Europe than across banks from emerging Europe. Banks from emerging Europe offer greater diversification potential and have a lower risk for financial resource allocation.