Volatility and asymmetric dependence in Central and East European stock markets

Nathan Lael Joseph, Thi Thuy Anh Vo, Asma Mobarek and Sabur Mollah
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Nathan Lael Joseph: Aston University
Asma Mobarek: Cardiff University
Sabur Mollah: University of Sheffield

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 4, No 4, 1303 pages

Abstract: 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.

Keywords: Cross-country contagion; Global financial crisis; Eurozone crisis; GARCH; Vector error-correction models; Time-varying copula functions (search for similar items in EconPapers)
JEL-codes: G1 G11 G14 G15 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-020-00874-0

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