A Time Varying Parameter Model to Test for Predictability and Integration in Stock Markets of Transition Economies
AbstractThis paper introduces a model, based on the Kalman filter framework, which allows for latent factors, time varying parameters, and a general GARCH structure for the residuals, extending the Bekaert and Harvey (1997) model. With this extension it is possible to test if an emerging stock market becomes more efficient over time and more integrated with other already established markets. We apply this models to the Czech, Polish, Hungarian, and Russian stock markets. We use data at daily frequency running from April 7th 1994 to July 10th 1997. We show that those markets have a rather heterogeneous pattern with regard to seasonalities and exhibit significant asymmetric GARCH effects where bad news generate greater volatility. In Hungary good news, instead, generate greater volatility leads us to formulate a liquidity hypothesis. A latent factor captures macroeconomic expectations. Concerning predictability, measured with time varying autocorrelations, Hungary reached efficiency before 1994. Russia shows signs of ongoing convergence towards efficiency. For Poland and the Czech Republic we find no improvements. With regard to market integration there is evidence that the importance of Germany has changed over time for all markets. Shocks in the UK are positively related to the Czech and Polish market but neither with the Russian nor the Hungarian ones. Shocks in the US have no impact on these markets but Russia. A strong negative correlation between Russia and the US and Germany tends to disappear.
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Bibliographic InfoPaper provided by HEC Paris in its series Les Cahiers de Recherche with number 635.
Length: 40 pages
Date of creation: 02 Jan 1998
Date of revision:
Central and Eastern Europe; stock indices; predictability; market integration;
Other versions of this item:
- Rockinger, Michael & Urga, Giovanni, 2000. "A Time Varying Parameter Model to Test for Predictability and Integration in Stock Markets of Transition Economies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2346, C.E.P.R. Discussion Papers.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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- Mubariz Hasanov & Tolga Omay, 2007. "Are the Transition Stock Markets Efficient? Evidence from Non-Linear Unit Root Tests," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 7(2), pages 1-12.
- Dieppe, Alistair & Pandiella, Alberto González & Hall, Stephen & Willman, Alpo, 2013. "Limited information minimal state variable learning in a medium-scale multi-country model," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 808-825.
- Bohl, Martin T. & Henke, Harald, 2003. "Trading volume and stock market volatility: The Polish case," International Review of Financial Analysis, Elsevier, Elsevier, vol. 12(5), pages 513-525.
- Cappiello, Lorenzo & Gérard, Bruno & Kadareja, Arjan & Manganelli, Simone, 2006. "Financial integration of new EU Member States," Working Paper Series, European Central Bank 0683, European Central Bank.
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