The role of the macroeconomic environment in shaping capital market co-movement in C.E.E. countries

Abstract

This article revisits the relationship between the contagion and co-movement of 10 Central and Eastern European (C.E.E.) financial markets in relation to two major Western European capital markets using wavelet-based methodology. Based upon an A.R.D.L. panel model we found that foreign monetary policy, national exchange rate and economic cycle play a key role in both shortand long-term co-movement between capital markets. While a stable economic environment coupled with a strong national currency can reduce the degree of short-term co-movement between capital markets, changes in foreign monetary policy could increase the effect of external shocks. Furthermore, we find that inflation, foreign exchange rate and foreign economic cycle play an important role after longer periods. By ensuring a stable economic environment national authorities can help mitigate the effects of external shocks on national capital markets.

Differences in Capital Market Network Structures under COVID-19

“…However, Central and East European currencies had a dramatically stronger interlinkage, pointing to the systemic nature of the drastic depreciations in 2020. The capital market impact of these periods of economic downturn has been examined in several recent studies (Onofrei et al, 2019;Cărăuşu et al, 2018;Armeanu et al, 2016), whose results are almost consistent with our fi ndings that market contagions are common in this region due to the close interconnectedness of the sample countries. The novelty of this study is based on our methodological approach, because we cannot fi nd any other paper in this topic using Student-t copulas and minimum spanning tree methods.…”