Long-Run Association Across Stock Markets in South-East Europe and Mean-Volatility Spillovers With Mature Markets

Abstract

This paper explores the inter-market linkages and the transmission of financial information among the capital markets of five South-Eastern European countries and their relationships with some of the mature markets. The Johansen co-integration framework pointed to the existence of one co-integrating vector, but the results could not be validated through standard tests. The VAR model that included the mature markets as well, revealed certain causal dependencies among the markets. Positive and significant ARCH and GARCH effects were found to exist on all of the markets, except in Slovenia and mean spillover effects from Germany into all of the younger markets were identified, as well as between some of the younger markets themselves. Volatility spillovers were also confirmed in almost the same instances. The implication for the investors is that they should closely monitor the trends in the leading markets as a source of valuable information for the composition of their portfolios. For the policymakers, the knowledge of the direction of the impacts is important for the purpose of predicting future exogenous shocks. An additional value of the paper is that these five markets, their mutual relationships and the linkages with mature markets are jointly analysed for the first time.