On the dynamic dependence and asymmetric co-movement between the US and Central and Eastern European transition markets

Abstract

In this paper, we attempt to evaluate the time-varying and asymmetric co-movement of CEE equity markets with the US stock markets around the subprime crisis and the resulting global financial crisis. The econometric approach adopted is based on recent development of time-varying copulas. For that, we propose a new class of time-varying copulas that allows for long memory behavior in both marginal and joint distributions. Our empirical approach relies on the flexibility and usefulness of bivariate copulas that allow to model not only the dynamic co-movement through time but also to account for any extreme interaction, nonlinearity and asymmetry in the co-movement patterns. The time-varying dependence structure can be also modeled conditionally on the economic policy uncertainty index of the crisis country. Empirical results show strong evidence of co-movement between the US and CEE equity markets and find that the co-movement exhibits large time-variations and asymmetry in the tails of the return distributions.