Abstract
This article investigates the financial convergence between Central and Eastern European (CEE) countries that are members of the European Union (EU). The analysis covers the period 2007–2014, which accounts for the global financial crisis and the sovereign debt crisis. To examine the convergence dynamics of these financial markets, we have employed the Phillips and Sul (2007) methodology, which uses a nonlinear time-varying factor model. This paper provides a comprehensive picture of the financial systems within CEE by testing the convergence of their stock markets together with their credit default swap spreads, long-term government bonds, and the banking sector. The empirical findings show that the CEE financial markets do not form a homogenous convergence club. Furthermore, in the aftermath of the global financial crisis and the sovereign debt crisis, the disparities between these financial markets have been amplified. The striking divergence revealed by our analysis emphasizes the different levels of development within the CEE financial markets. The CEE countries should implement further structural reforms in order to achieve greater financial convergence.
Published Version
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