The Comovement of Exchange Rates and Stock Markets in Central and Eastern Europe

Abstract

This paper analyses the link between exchange rates and stock markets in four Central and Eastern European countries. We simultaneously explore the comovements of foreign exchange markets and stock markets at the cross-country level and the link between these two markets within each country while employing a Dynamic Conditional Correlation Mixed Data Sampling (DCC-MIDAS) model. Such an approach to financial markets conveys a much more visible picture of the existing patterns of financial integration between these markets that would otherwise be neglected. The estimates reveal significant differences between the patterns of correlation in our sample countries. First, the paper finds a quite low degree of convergence between foreign exchange markets, with rising correlations during some of the crisis episodes. Second, both the 2004 European Union enlargement and the European sovereign debt crisis underpin the stock market comovements in the Central and Eastern European countries. Third, the correlations between the exchange rate returns and stock markets rise mostly during the European sovereign debt crisis and to a lesser extent during the global financial crisis, revealing signs of contagion and lower portfolio diversification opportunities. These results are of utmost relevance for the process of financial integration and they also have important implications for policy makers, risk management, and investors.

Givers or Recipients? Co-Movements between Stock Markets of CEE-3 and Developed Countries

“…Moreover, after 2013, a significant decrease in conditional correlations between shocks for pairs in the group of CEE-3 countries has been recorded. This finding is confirmed by the results obtained by, among others, the authors of [30], who noted that the evolution of the stock indices in the CEE-3 countries followed different paths after 2012.…”

“…In line with expectations, net pairwise volatility spillovers between developed and CEE-3 stock markets decreased significantly after the announcement of the OMT program. A decrease in the sensitivity of stock markets to external volatility in the CEE-3 countries after 2012 is in line with the H2 hypothesis and the findings of other studies covering this period [7,30].…”

“…Their evidence indicated the coexistence of a contagion and a permanent change in the correlation structure. In Moagăr-Poladian, Clichici and Stanciu's article [30], it was reported that a significant increase in the volatility of correlations between CEECs and developed countries occurred after 2008. They noticed that the countries of Central and Eastern Europe were volatility takers in turbulent times, when the volatility spillovers were uncommonly high.…”

“…As Grabowski [7] noted, after the introduction of the OMT program, in Visegrad countries, the sensitivity of the stock market returns to external shocks became weaker, not only in comparison with the crisis period but in comparison with the pre-crisis period as well. Moreover, as Moagăr-Poladian, Clichici and Stanciu [30] noted, after 2012, the evolution of the stock market indices in Poland, the Czech Republic, and Hungary has followed different paths. The level of integration between stock markets in the CEE-3 countries has decreased significantly.…”

Integration in Bric Stock Markets: An Empirical Analysis

“…These findings have important implications for international investors, portfolio managers and policy makers. While the authors Moagar-Poladian, Clichici and Stanciu (2019) show that the markets of Central and Eastern Europe show a significant level of integration during the European financial crisis. Jawadi, Chlibi and Cheffou (2019) studied the movements between the US market and the G6, BRICS and MENA markets.…”