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Volume 65, Issue 5

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Central and Eastern European Stock Exchanges under Stress: A Range-Based Volatility Spillover Framework

Bayraci, Selcuk; Demiralay, Sercan

Year: 2015   Volume: 65   Issue: 5   Pages: 411-430

Abstract: In this paper we analyze volatility spillovers among stock markets of Central and Eastern European (CEE) countries: Poland, Hungary and the Czech Republic vis-à-vis Germany, the United States and Russia. For this, we utilize the recent and original methodology of Diebold and Yilmaz (2012) consisting in total and directional spillover analyses with a conditional autoregressive range (CARR) model. The overall results suggest that propagation of volatility exists among the CEE stock markets to a certain degree (43%) and the inclusion of the two developed markets and Russia into the analysis induces a higher level of the transmission (57.5%). We also discover that volatility spillovers are strongly responsive to episodes of extreme market stress. The results of net volatility spillovers reveal increasing volatility spillovers during the US subprime mortgage crisis and the ongoing eurozone crises, particularly from Germany and the US to Poland and Hungary. Concordantly, we provide evidence of increasing financial integration of the CEE countries with the global markets as the CEE countries eventually became more vulnerable to the shocks originating in other markets. The findings of this paper have potential implications for portfolio managers and policymakers in comprehending the nature of cross-country volatility transmission over the course of time.

JEL classification: C32, C58, G01

Keywords: volatility transmission, Central and Eastern European stock markets, forecast error variance decompositions, financial crises

RePEc: http://ideas.repec.org/a/fau/fauart/v65y2015i5p411-430.html

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