Exploring the Contagion Effect from Developed to Emerging CEE Financial Markets

Abstract

The paper aims to analyze the contagion effect coming from the developed stock markets of the US and Germany to the emerging CEE stock markets of Romania, Czech Republic, Hungary, and Poland using daily data for the period April 2005–April 2021. The paper also captures the level of integration of these emerging stock markets by analyzing the volatility spillover phenomenon. The quantification of the contagion effect coming from the developed to the emerging stock markets consisted of an empirical analysis based on the DCC-GARCH (Dynamic Conditional Correlation) model. Through this multivariate model, the time-varying conditional correlations were analyzed, both in periods of normal economic development and in times of economic instability, when there was a significant increase in the correlation coefficients between developed and emerging stock market indices. Furthermore, the level of connectedness between these markets has been analyzed using the volatility spillover index developed by Diebold and Yilmaz. The empirical results surprised the high level of integration of the analyzed stock markets in Central and Eastern Europe, with the intensity of volatility transmission between these markets increasing significantly during times of crisis. All stock market indices analyzed show periods during which they transmit net volatility and periods during which they receive net volatility, indicating a bidirectional volatility spillover phenomenon. Mostly, the BET, PX, and WIG indices are net transmitters of volatilities, whereas the BUX index is net recipient, except during the COVID-19 crisis, when it transmitted net volatility to the other three indices. Finally, using a Markov switching-regime VAR approach with two regimes, we explored the contagion effect between emerging CEE and developed stock markets during the COVID-19 pandemic. The empirical results proved a shift around the outbreak of the health crisis, after which the high volatility regime dominates the CEE markets. The contagion effects from developed stock markets to emerging CEE markets significantly increased during the first stage of the health crisis.

Interconnected Markets: Unveiling Volatility Spillovers in Commodities and Energy Markets through BEKK-GARCH Modelling

“…It delineates a scenario wherein the conditions of one market can reverberate across others, amplifying volatility and risk within the concerned markets and the broader financial system. Its inception traces back to the seminal work of Kaminsky, Lizondo, and Reinhart in 1998, who scrutinised the contagion impacts of the 1997 Asian financial crisis, uncovering the diffusion of shocks from weaker economies to other countries within the continent before extending to global financial markets [10]. Davidescu et al referenced Forbes and Rigobon as scholars instrumental in establishing a framework for discerning contagion effects across diverse markets [10].…”

“…Its inception traces back to the seminal work of Kaminsky, Lizondo, and Reinhart in 1998, who scrutinised the contagion impacts of the 1997 Asian financial crisis, uncovering the diffusion of shocks from weaker economies to other countries within the continent before extending to global financial markets [10]. Davidescu et al referenced Forbes and Rigobon as scholars instrumental in establishing a framework for discerning contagion effects across diverse markets [10]. Their analysis of global financial crises, including those in Asia and Russia in 1997 and 1998, utilising a factor model, revealed a common and idiosyncratic volatility element across these markets.…”

Spillover effects and transmission of shocks in Visegrad equity markets

“…Specifically, their findings demonstrate bidirectional return and co-volatility links between the returns on the CEE exchanges with the world equity index. A year later, Davidescu et al (2023) 2016) also investigated spill-over effects from international stock markets to CEE, highlighting Polish, Czech and Hungarian markets with higher integration. The Greek debt crisis in late 2009 placed the Eurozone growth into negative territory.…”

“…Specifically, their findings demonstrate bidirectional return and co-volatility links between the returns on the CEE exchanges with the world equity index. A year later, Davidescu et al (2023) also explored contagion effects from developed to the CEE financial markets. They focus on Romania, the Czech Republic, Hungary and Poland using daily data from April 2005 to April 2021.…”

Quantitative Modeling of Financial Contagion: Unraveling Market Dynamics and Bubble Detection Mechanisms

“…Additionally, the ways in which other stock markets can influence the Romanian market have been examined. For instance, in the research of Davidescu et al (2023), the effect of financial contagion was analyzed using a Dynamic Conditional Correlation Model. The authors' findings highlighted that the stock markets of the USA and Germany influence the emerging stock markets of Central and Eastern Europe.…”