The Comovement of Exchange Rates and Stock Markets in Central and Eastern Europe
Simona Moagăr-Poladian (),
Dorina Clichici () and
Cristian-Valeriu Stanciu ()
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Simona Moagăr-Poladian: Institute for World Economy, Romanian Academy, Bucharest 050711, Romania
Dorina Clichici: Institute for World Economy, Romanian Academy, Bucharest 050711, Romania
Cristian-Valeriu Stanciu: Finance Department, University of Craiova, Craiova 200585, Romania
Sustainability, 2019, vol. 11, issue 14, 1-22
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.
Keywords: foreign exchange markets; stock markets; global financial crisis; European sovereign debt crisis; Central and Eastern Europe (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:11:y:2019:i:14:p:3985-:d:250829
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