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Exploring the Contagion Effect from Developed to Emerging CEE Financial Markets

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  • Adriana AnaMaria Davidescu

    (Department of Statistics and Econometrics, The Bucharest University of Economic Studies, 010552 Bucharest, Romania
    Department of Education, Training and Labor Market, National Scientific Research Institute for Labor and Social Protection, 010643 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
    The Financial Supervisory Authority, 050092 Bucharest, 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)

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.

Suggested Citation

  • Adriana AnaMaria Davidescu & Eduard Mihai Manta & Razvan Gabriel Hapau & Mihaela Gruiescu & Oana Mihaela Vacaru (Boita), 2023. "Exploring the Contagion Effect from Developed to Emerging CEE Financial Markets," Mathematics, MDPI, vol. 11(3), pages 1-50, January.
    • Handle: RePEc:gam:jmathe:v:11:y:2023:i:3:p:666-:d:1049896
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    2. Jorge Omar Razo-De-Anda & Luis Lorenzo Romero-Castro & Francisco Venegas-Martínez, 2023. "Contagion Patterns Classification in Stock Indices: A Functional Clustering Analysis Using Decision Trees," Mathematics, MDPI, vol. 11(13), pages 1-27, July.

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