Effects of the Stock Market Dynamic Linkages on the Central and Eastern European Capital Markets

Authors: Ioan Popa, Cristiana Tudor, Radu Lupu

Abstract:

The interdependences among stock market indices were studied for a long while by academics in the entire world. The current financial crisis opened the door to a wide range of opinions concerning the understanding and measurement of the connections considered to provide the controversial phenomenon of market integration. Using data on the log-returns of 17 stock market indices that include most of the CEE markets, from 2005 until 2009, our paper studies the problem of these dependences using a new methodological tool that takes into account both the volatility clustering effect and the stochastic properties of these linkages through a Dynamic Conditional System of Simultaneous Equations. We find that the crisis is well captured by our model as it provides evidence for the high volatility – high dependence effect.

Keywords: Stock market interdependences, Dynamic System ofSimultaneous Equations, financial crisis

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1329797

References:

[1] Bekaert, G., C.R., Harvey (2003), Emerging markets finance, Journal of Empirical Finance, Vol. 10 pp. 3 - 56
[2] Bessler, D. A., and Yang, J. 2003. The Structure of Interdependence in International Stock Markets. Journal of International Money and Finance 22, 261-287.
[3] Booth, G.G., T. Martikainen and Y. Tse. 1997. Price and Volatility Spillovers in Scandinavian Stock Markets. Journal of Banking & Finance 21, 811-823.
[4] Chen G, Firth M, Rui O. 2002. "Stock market linkages: evidence from Latin America" Journal of Banking and Finance 26: 1113-1141
[5] Cheung, L., Laurence Fung and Chi-Sang Tam, 2008, Measuring Financial Market Interdependence and Assessing Possible Contagion Risk in the EMEAP Region, Hong Kong Monetary Authority Working Papers series, number 0818
[6] Click, R. W. and Plummer, M.G. 2005. Stock Market Integration in ASEAN After the Asian Financial Crisis. Journal of Asian Economics 16, 5-28.
[7] Cont, R., Empirical Properties of Asset Returns: Stylized Facts and Statistical Issues, Quantitative Finance, 1, 2001;
[8] De Santis, Giorgio and Imrohoroglu, Selahattin. 1997. Stock returns and volatility in emerging financial markets. Journal of International Money and Finance 16, 561-579.
[9] Elna Pretorius, Economic determinants of emerging stock market interdependence, Emerging Markets Review, Volume 3, Issue 1, 1 March 2002, Pages 84-105
[10] Eun, Cheol S. and Sangdal Shim. 1989. International Transmission of Stock Market Movements. Journal of Financial and Quantitative Analysis 24: 241-256.
[11] Gelos R, Sahay R. 2001. "Financial market spillovers in transition economies". Economics of Transitions 9: 53-86
[12] Glezakos, Michalis, Anna Merika and Haralambos Kaligosfiris, Interdependence of Major World Stock Exchanges: How is the Athens Stock Exchange Affected?, International Research Journal of Finance and Economics, Issue 7 (2007), 24-39
[13] Granger, C. 1969. Investigating causal relations by economic models and cross-spectral methods. Econometrica 37:424-38.
[14] Hahm, S. 2003. Transmission of Stock Returns and Volatility: The Case of Korea. The Journal of Korean Economy 5, 17-45.
[15] Hamao, Y., R.W. Masulis and V. Ng. 1990. Correlations in price changes and volatility across international stock markets. The Review of Financial Studies 3:281-307.
[16] In F., Kimb S., Yoonb, J.H and Vineyc C., Dynamic interdependence and volatility transmission of Asian stock markets: Evidence from the Asian crisis, International Review of Financial Analysis Volume 10, Issue 1, Spring 2001, Pages 87-96
[17] Lupu R, Tudor, C., 2008. "Direction of Change at the Bucharest Stock Exchange," Romanian Economic Journal, vol. 11(27), pages 165-185
[18] Lupu, R., Lupu, I., Contagion across Central and Eastern European Stock Markets: A Dynamic Conditional Correlation Test, Journal of Economic Computation and Economic Cybernetics Studies and Research, vol. 4, 2009, pages 173-186
[19] Masih AMM, Masih R. 1997. "Dynamic linkages and the propagation mechanism driving major international stock markets". Quarterly Review of Economics and Finance 37:859-885
[20] Ng, A., 2000, "Volatility Spillovers effects from Japan and the US to the Pacific Basin", Journal of International Money and Finance, 19, 207- 233.
[21] Tudor, C., 2009, Information Transmission between International Stock Markets and Bucharest Stock Exchange during a Turbulent Period (2007-2009), Oeconomica Nr. 3/2009
[22] Tudor, C., 2009. "Price Ratios and the Cross-section of Common Stock Returns on Bucharest Stock Exchange: Empirical Evidence," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 6(2), pages 132-146,
[23] Van Rijckeghem C, Weder B. 2001. "Sources of contagion: Is it finance or trade?" Journal of International Economics 54: 293-308M. Young, The Techincal Writers Handbook. Mill Valley, CA: University Science, 1989.