Higher Moments Actually Matter: Spillover Approach for Case of CESEE Stock Markets

Abstract

The interconnectedness of stock markets is an important topic in empirical research, as spillovers on financial markets matter for asset pricing, portfolio allocation, financial stability, and risk management. This research focuses on all four moments of return distributions on stock markets and their spillovers between CESEE (Central, Eastern, and South-Eastern Europe) stock markets. Higher moments analysis needs to be explored more deeply, but can provide detailed insights into distribution shifts of market returns due to shocks in other markets. This research fills such a gap in the literature by estimating spillover effects between the four moments of stock market return distributions. Based on data from January 2013 to September 2022, the VAR (vector autoregression) model is estimated for individual moments across stock markets as a base for the calculation of spillover indices. The main findings indicate that it is difficult to track all the spillovers at once as the net emitter of shocks to one or other of the countries involved often change to being a net receiver and vice versa. Moreover, higher moments spillovers matter for individual markets, which has important implications for dynamic portfolio selection.