Contagion and interdependence: measuring CEE banking sector co-movements

Terhi Jokipii and Brian M. Lucey ()
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Terhi Jokipii : Bank of Finland and Trinity College Dublin, Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland

No 15/2006, Research Discussion Papers from Bank of Finland

Abstract: Making use of ten years of daily data, this paper examines whether banking sector co-movements be-tween the three largest Central and Eastern European Countries (CEECs) can be attributed to contagion or to interdependence. Our tests based on simple unadjusted correlation analysis uncover evidence of conta-gion between all pairs of countries. Adjusting for market volatility during turmoil, however, produces dif-ferent results. We then find contagion from the Czech Republic to Hungary during this time, but all other cross-market co-movements are rather attributable rather to strong cross-market linkages. In addition, we construct a set of dummy variables to try to capture the impact of macroeconomic news on these markets. Controlling for own-country fundamentals, we discover that the correlations diminish between the Czech Republic and Poland, but that coefficients for all pairs remain substantial and significant. Finally, we ad-dress the problem of simultaneous equations, omitted variables and heteroskedasticity, and adjust our data accordingly. We confirm our previous findings. Our tests provide evidence in favour of parameter insta-bility, again signifying the existence of contagion arising from problems in the Czech Republic affecting Hungary during much of 1996.

Keywords: contagion; interdependence; macroeconomic news; banking sector; stock returns (search for similar items in EconPapers)
JEL-codes: F30 F40 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-eec, nep-ets, nep-fin, nep-fmk and nep-tra
Date: 2006-07-03
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Journal Article: Contagion and interdependence: Measuring CEE banking sector co-movements (2007)
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