Givers or Recipients? Co-Movements between Stock Markets of CEE-3 and Developed Countries

Grabowski Grabowski

doi:10.3390/su11226495

Abstract

In this paper, time-varying co-movements between the stock markets of Poland, the Czech Republic, Hungary, and the capital markets of developed countries in stable and crisis periods are studied. The parameters of the VAR-AGDCC-GARCH (Vector Autoregressive- Asymmetric Generalized Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroscedasticity) model are estimated, and volatility spillovers are calculated. The evidence suggests that the level of correlation between stock return shocks of Central and Eastern European countries increased significantly in the period of financial turmoil and was high in the period of the US sub-prime crisis, as well as during the euro area sovereign debt crisis. After the announcement of the OMT (Outright Monetary Transactions) program, the evolution of the stock market indices in Central and Eastern Europe countries (CEECs) have followed different paths. An analysis of the volatility spillovers indicates that CEECs are the recipients of volatility. In the period of 2004–2019, they received much volatility—from Germany and the US, in particular. They also received much volatility from Spain during the euro area sovereign debt crisis. After 2012, volatility transmission to Poland, the Czech Republic, and Hungary dropped significantly.

Highlights

Financial integration critically affects the functioning of any economy at both the micro and macro levels
Since the business cycles of the CEE-3 countries are strongly synchronized with the business cycles of Germany [36] and because the rates of return on these stock indexes depend on the rate of return on DAX (Deutscher Aktienindex) (e.g., [7]), the major stock market of the European Union was taken into account
The intensity of volatility spillovers to the CEE-3 stock markets is stronger in turbulent periods than in tranquil periods

Summary

Introduction

Financial integration critically affects the functioning of any economy at both the micro and macro levels. The illiberal turn, which has been identified as a very important event in the politics of the European Union in recent years [14], might have had a significant impact on the performance of stock markets in CEE-3 countries, as well as their integration with the markets of developed economies. The identification of this impact seems to be crucial from the point of view of policy of the European Union, as well as from the perspective of the future enlargement of the euro area.

Literature Review

Materials and Methods

Results and Discussion

Conclusions