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Stock market's response to real output shocks in Eastern European frontier markets: A VARwAL model

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  • Ülkü, Numan
  • Kuruppuarachchi, Duminda
  • Kuzmicheva, Olga

Abstract

We study stock market's response to real output shocks in the small and young Eastern European frontier markets, and compare to the larger European emerging- and world's most developed markets. To obtain a complete time profile of stock market's response, we use a Vector Auto-regression with Asymmetric Leads (VARwAL) model, which is a special case of the mix (noncausal) VARs. Results confirm its efficacy: in every country, both the forward-looking and delayed components of stock market's response are significant. Stock market returns forecast future real output equally well in Eastern European frontier markets as in developed and larger-emerging markets. The distant-horizon forward-looking response is larger in frontier markets, whereas the near-horizon forward-looking response is larger in developed markets.

Suggested Citation

  • Ülkü, Numan & Kuruppuarachchi, Duminda & Kuzmicheva, Olga, 2017. "Stock market's response to real output shocks in Eastern European frontier markets: A VARwAL model," Emerging Markets Review, Elsevier, vol. 33(C), pages 140-154.
    • Handle: RePEc:eee:ememar:v:33:y:2017:i:c:p:140-154
    DOI: 10.1016/j.ememar.2017.09.004
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    More about this item

    Keywords

    Stock market – real output interaction; Eastern European frontier markets; VARwAL model;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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