Commonalities in Returns in the Stock Markets of the Visegrad Group: A Quantile Coherency Approach

Blanka Łęt

doi:10.5817/fai2020-2-3

Abstract

The aim of this paper is to investigate the dependence structure in the frequency domain for the joint distribution of returns from the stock markets in the countries belonging to the V4 countries. We analyze twenty-years of historical daily prices of four main stock indices from the Czech Republic, Hungary, Poland, and Slovakia. Using a quantile coherency measure we found, that linkages between Czech, Hungarian, and Polish stock markets are significantly positive for all considered quantiles and frequencies. These three markets are more strongly dependent during the long downturns and the effect is permanent after the European Union accession. The Slovak stock market is the least connected with other countries in the group. Results of the paper revealed, that Czech, Hungarian and Polish stock market is subject to similar trends in terms of returns for different investment horizons. International market participants should incorporate interdependencies between these markets during the portfolio building process.

Highlights

According to the information from the Visegrad Declaration on Cooperation (Visegrad Group, 1991), one of the practical aspects of their partnership is to “develop economic cooperation, based on the principles of the free market, and mutually beneficial trade in goods and services, (...) to create favorable conditions for direct cooperation of enterprises and foreign capital investments, aimed at improving economic effectiveness”
We found the answers to the following research questions: We found, that coherencies between Czech, Hungarian, and Polish stock markets are significantly positive for all considered quantiles and investing horizons
The Slovak stock market is the least connected with other countries in the group

Summary

Introduction

According to the information from the Visegrad Declaration on Cooperation (Visegrad Group, 1991), one of the practical aspects of their partnership is to “develop economic cooperation, based on the principles of the free market, and mutually beneficial trade in goods and services, (...) to create favorable conditions for direct cooperation of enterprises and foreign capital investments, aimed at improving economic effectiveness”. One of the important parts of a market economic system and a financial market is a capital market, whose performance one can track using selected stock market indices. We extend previous works devoted to the dependencies between the stock markets in the V4 countries. The main contribution to the existing literature is to investigate differences in the strength of linkages related to the investment horizon and to consider returns from different parts of the distribution. To this end, we employ the quantile coherency approach to analyze the frequency-dependent structure of correlations in different quantiles of the joint distribution of a twodimensional process of returns. We set the following research questions: RQ1: Are the coherencies between market returns in all V4 countries at a similar level?

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Discussion

Conclusion