Exploring the Contagion Effect from Developed to Emerging CEE Financial Markets

Adriana AnaMaria Davidescu (), Eduard Mihai Manta, Razvan Gabriel Hapau, Mihaela Gruiescu and Oana Mihaela Vacaru (Boita)
Additional contact information
Adriana AnaMaria Davidescu: Department of Statistics and Econometrics, The Bucharest University of Economic Studies, 010552 Bucharest, Romania
Eduard Mihai Manta: Doctoral School of Cybernetics and Statistics, Bucharest University of Economic Studies, 010374 Bucharest, Romania
Razvan Gabriel Hapau: Doctoral School of Finance, Western University of Timisoara, 300223 Timisoara, Romania
Mihaela Gruiescu: Faculty of Managerial Informatics, Department of Informatics, Statistics, Mathematics, Romanian-American University, 012101 Bucharest, Romania
Oana Mihaela Vacaru (Boita): Doctoral School of Cybernetics and Statistics, Bucharest University of Economic Studies, 010374 Bucharest, Romania

Mathematics, 2023, vol. 11, issue 3, 1-50

Abstract: The paper aims to analyze the contagion effect coming from the developed stock markets of the US and Germany to the emerging CEE stock markets of Romania, Czech Republic, Hungary, and Poland using daily data for the period April 2005–April 2021. The paper also captures the level of integration of these emerging stock markets by analyzing the volatility spillover phenomenon. The quantification of the contagion effect coming from the developed to the emerging stock markets consisted of an empirical analysis based on the DCC-GARCH (Dynamic Conditional Correlation) model. Through this multivariate model, the time-varying conditional correlations were analyzed, both in periods of normal economic development and in times of economic instability, when there was a significant increase in the correlation coefficients between developed and emerging stock market indices. Furthermore, the level of connectedness between these markets has been analyzed using the volatility spillover index developed by Diebold and Yilmaz. The empirical results surprised the high level of integration of the analyzed stock markets in Central and Eastern Europe, with the intensity of volatility transmission between these markets increasing significantly during times of crisis. All stock market indices analyzed show periods during which they transmit net volatility and periods during which they receive net volatility, indicating a bidirectional volatility spillover phenomenon. Mostly, the BET, PX, and WIG indices are net transmitters of volatilities, whereas the BUX index is net recipient, except during the COVID-19 crisis, when it transmitted net volatility to the other three indices. Finally, using a Markov switching-regime VAR approach with two regimes, we explored the contagion effect between emerging CEE and developed stock markets during the COVID-19 pandemic. The empirical results proved a shift around the outbreak of the health crisis, after which the high volatility regime dominates the CEE markets. The contagion effects from developed stock markets to emerging CEE markets significantly increased during the first stage of the health crisis.

Keywords: financial contagion; dynamic conditional correlation; COVID-19 crisis; emerging European stock markets; Markov switching-regime approach (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.mdpi.com/2227-7390/11/3/666/pdf (application/pdf)
https://www.mdpi.com/2227-7390/11/3/666/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jmathe:v:11:y:2023:i:3:p:666-:d:1049896

Access Statistics for this article

Mathematics is currently edited by Ms. Emma He

More articles in Mathematics from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().