Spillover effects from London and Frankfurt to Central and Eastern European stock markets

Abstract

This article investigates comovement in stock markets between the emerging economies of Central and Eastern Europe (CEE) and the developed markets of Western Europe. Three approaches are employed to examine this issue. The first two approaches, time-varying realized correlation ratios and cointegration statistics, use a two-step technique to derive time-varying estimates of the comovement between returns on CEE and EU stock exchanges. The first step uses common factor analysis to define the factors driving CEE stock exchanges, while the second step evaluates the relationship between the leading principal factor for CEE countries and the Deutsche Aktien Xchange (DAX) and Financial Times Stock Exchange (FTSE) using time-varying realized correlation and rolling cointegration statistics. The third approach employs Multivariate Generalized Autoregressive Conditional Heteroscedasticity (MGARCH) techniques to obtain estimates of mean and variance spillover effects.

Spillover effect in Asian financial markets: A VAR-structural GARCH analysis

“…Baur and Jung (2006) showed the spillover effect between the USA and Germany. Christiansen (2007) investigated world and regional shocks in European countries before and after the introduction of the euro currency, and Harrison and Moore (2009) proposed methods to examine dynamic spillovers.…”

Volatility and Correlations for Stock Markets in the Emerging Economies of Central and Eastern Europe: Implications for European Investors

“…Another approach, adopted by Bruggemann and Trenkler (2007) discusses the catching up process in the Czech Republic, Hungry and Poland by investigating GDP behaviour. The spillover effects of emerging markets had been presented by Harrison and Moore (2009) and the comovements and volatility of ten eastern european countries have been discussed. Overall, the majority of past studies of stock markets correlation and volatility have been undertaken on developed markets or advanced emerging markets such as the Czech Republic, Hungary and Poland whilst the behaviour and inter-relationship of all others has been neglected.…”

Financial market spillovers around the globe

“…The paper by Soriano and Climent (2006) provides a useful survey, while Melvin and Melvin (2003) dis-cuss different sources of volatility spillovers in the context of the closely related exchange rate markets. Diebold and Yilmaz (2009) and Harrison and Moore (2009) are recent contributions which investigate international volatility dynamics and spillovers. While their approaches are quite distinct from ours, their general results, namely the detection of foreign volatility influences on home market volatility, are in line with the results of this paper.…”