Contagion and interdependence: Measuring CEE banking sector co-movements

Abstract

Making use of ten years of daily data, this paper examines whether banking sector co-movements between the three largest Central and Eastern European Countries (CEECs) can be attributed to contagion or to interdependence. Our tests based on simple unadjusted correlation analysis uncover evidence of contagion between all pairs of countries. Adjusting for market volatility during turmoil, however, produces different results. We then find contagion from the Czech Republic to Hungary during this time, but all other cross-market co-movements are rather attributable rather to strong cross-market linkages. In addition, we construct a set of dummy variables to try to capture the impact of macroeconomic news on these markets. Controlling for own-country fundamentals, we discover that the correlations diminish between the Czech Republic and Poland, but that coefficients for all pairs remain substantial and significant. Finally, we address the problem of simultaneous equations, omitted variables and heteroskedasticity, and adjust our data accordingly. We confirm our previous findings. Our tests provide evidence in favour of parameter instability, again signifying the existence of contagion arising from problems in the Czech Republic affecting Hungary during much of 1996.

An analysis of dependence between Central and Eastern European stock markets

“…The findings also corroborate the results from other studies of CEE stock market co-movement that used different empirical techniques (see, e.g. Drakos and Kutan, 2005;Chelley-Steeley, 2005;Cappiello et al, 2006;Jokipii and Lucey, 2007;Gjika and Horvath, 2013). However, our results run contrary to those of Avdulaj and Barunik (2013), who reported that the crisis did not cause a reduction in international diversification benefits between the Czech and German stock markets.…”

“…Employing daily data for CEE banking sectorial indices for the Czech Republic, Hungary and Poland, Jokipii and Lucey (2007) found persistent contagion between all country pairs. Other studies have used spectral and time-frequency analysis to assess CEE stock market comovements.…”

Shift‐contagion Vulnerability in the MENA Stock Markets

“…The null hypothesis of interdependence (as opposed to contagion) is tested as , where and are the adjusted correlation coefficients calculated for the crisis and tranquil periods, respectively. This seminal approach has been used as a benchmark in many empirical studies of shift‐contagion to emerging markets (Collins and Biekpe, 2002; Serwa and Bohl, 2005; Jokipii and Lucey, 2007). However, equation (1) assumes that r 1 depends linearly on r 2 .…”

“…Depending on its severity, financial contagion may nonetheless affect portfolio allocation strategies, the direction and magnitude of capital flows and, ultimately, economic stability. In‐depth investigations of financial vulnerability have already been undertaken in most emerging market areas, including East Asia (Forbes and Rigobon, 2002), Eastern Europe (Serwa and Bohl, 2005; Jokipii and Lucey, 2007), or Sub‐Saharan Africa (Collins and Biekpe, 2002), with contrasting results. Analysing the shock transmission mechanism in the MENA markets would thus deepen our understanding of the stock market development process in this region.…”

Banking contagion under different exchange rate regimes in CEE

“…This process generated individual characteristics for the vulnerability and stability of the CEE banking sector. (Benczes 2008: 128-138) According to Jokipii and Lucey (2002), by the 2000s, the CEE banking sectors were over the privatization, deregulation, liberalization of licensing, and capitalization by foreign investors. The 1990s already saw market clearing by bank failures, especially in the case of under-capitalized, domestic small banks.…”