An Analysis of Romanian Capital, Forex and Monetary Markets: Volatilities and Contagion

Abstract

This paper focuses on stability relations for the Romanian main financial markets: capital, ForEx and monetary markets, as well as the intensity of the link between them and how they are interconnected, because this represents the best indicator of the situation of an economy, which is seen as a complex, adaptive and dynamic system, that is continuously changing. This analysis examines their deviation from the state of equilibrium, and what are the factors that modify this state. The study incorporates the markets evolution, their estimated volatilities, it shows that the most sensitive to the impact of a financial shock are the currency and the stock market. All the obtained results are correlated with events, news and market information from those particular moments to find explanations and understand the behavior of investors and how their decisions affected the market. Because of instability on some markets, investors started moving their finances to other markets, where they had more confidence, causing imbalances. Behavior of investors, as they react to the emergence of a shock, is decisive and extremely important in anticipating the effects that such a financial shock can produce. The values of the estimated volatilities were embedded into a volatility table to be easier to track their evolution over the period under review (2007 – 2018). Besides the financial crisis, there have been other events that have translated into a higher degree of volatility: raising the minimum wage, the Brexit, protests against corruption, the raise of salaries for the public workers which has created instability in the monetary market. The analysis continues with an estimate of a spillover index that only confirms the significant vulnerability period in the markets: 2010-2012, period during which the phenomenon of contagion may have occurred.