Stock Market Asymmetric Volatility and Macroeconomic Dynamics in Central and Eastern Europe

Abstract

The risk on financial markets drives the performance of stock market investments in a national capital market, hence its interpretation in the minds of investors has a large influence on the dynamics of asset prices. The academic inclusion of fear on the financial markets is realized by the use of the concept of utility in a field that became mostly empirical in the development of modern finance. The creation of models on financial markets takes into account the so-called downside volatility reaction, as a stylized fact defined as the negative correlation between the return of a financial asset and the volatility of that asset. Our paper aims to measure this asymmetric volatility effect on the dynamics of Eastern European stock markets by using a wide set of GARCH models with coefficients for the effect of asymmetry and to detect its connection with the development of the macroeconomic environment. The objective is to reflect the differences between this connection and similar ones specific to developed economies.