Volatility and asymmetric dependence in Central and East European stock markets

Abstract

We study the effects of contagion around the global financial crisis (GFC) and the Eurozone crisis periods using German and UK returns, each paired with returns from Central and East European (CEE) stock markets that recently joined the European Union (EU). Using bivariate vector error-correction models (VECMs) estimated in GARCH(1,1), we find strong support for long-run equilibrium conditions. This finding suggests that tests of tail dependence using differenced VARs may be mis-specified when long-run equilibrium conditions apply. Past news has more persistence on current volatility in CEE markets than in the developed markets. Past volatility has more persistence in the developed markets compared to the CEE markets. The T-V symmetrized Joe-Clayton (T-V SJC) copula outperforms all other copulas in goodness-of-fit, including, the T-V Gaussian and Student t copulas. This result is supported by a differenced VAR-GARCH (1,1). For CEE and developed market returns, no more than half of our market pairs exhibit significant increases in lower tail dependence, under the T-V SJC copula. Given the number of paired comparisons, the evidence on joint extreme dependence is weak. As such, CEE stock markets experienced little contagion effects during the GFC and Eurozone crisis periods, contrary to prior results. We find that the legal environment negatively impacts financial development, perhaps causing CEE and the EU markets to be isolated.

The Effect of Financial Development and International Trade on Deregulation

“…The Hansen J-statistic of the over-identifying restrictions showed that the null hypothesis that the instrument's correlations do not affect the error terms cannot be rejected. The results also showed that the model has good instruments by way of revealing the First stage F-statistic (p-value ≤0.01; Joseph et al, 2020). The lagged dependent variable enter the regression was significantly positive, this effectively assumes a system-GMM type model lends empirical support to the hypothesis that, indeed the impact of financial development on international trade deregulation cannot be estimated.…”

“…Kurtosis is always positive and statistically significant at 1% levels across variables. Generally, the existence of kurtosis stipulates evidence for volatility clustering and fattailed (Joseph et al, 2020). The jarque-bera statistics rejected the normality test at the 1% level of Journal of Applied Business and Economics Vol.…”

Does share capital mater for company performance?

“…In the context of popularizing IFRS, as well as learning about the mechanisms occurring in the 'relational investor' markets, especially emerging markets, the results showing low market information efficiency after an IPO are important. The more so that, as indicated by Joseph et al (2020), despite the coordinated economic and financial policies of EU members, the markets of Eastern Europe do not show the desired level of market integration. The article has shown that information efficiency is noticeable during IPOs because of the great interest of investors in new companies, but it disappears after the IPO.…”

Stock Market Volatility and Persistence: Evidence from High-Income and Middle-Income Economies

“…Empirically, there is a broad acknowledgment that stock markets can be volatile in developed and developing economies, but studies seem to differ on the level of volatility and persistence. Joseph, Vo, Mobarek, and Mollah (2020) suggest that volatility persists in developed economies than in less developed countries in central and eastern European markets. A similar outlook is expressed in Mallikarjuna and Rao (2019), which hints that stock markets in developed countries are more sensitive to information than their counterparts in developing countries.…”