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Contagion and interdependence: Measuring CEE banking sector co-movements

  • Jokipii, Terhi
  • Lucey, Brian

Making use of ten years of daily data, this paper examines whether banking sector co-movements be-tween the three largest Central and Eastern European Countries (CEECs) can be attributed to contagion or to interdependence. Our tests based on simple unadjusted correlation analysis uncover evidence of conta-gion between all pairs of countries. Adjusting for market volatility during turmoil, however, produces dif-ferent results. We then find contagion from the Czech Republic to Hungary during this time, but all other cross-market co-movements are rather attributable rather to strong cross-market linkages. In addition, we construct a set of dummy variables to try to capture the impact of macroeconomic news on these markets. Controlling for own-country fundamentals, we discover that the correlations diminish between the Czech Republic and Poland, but that coefficients for all pairs remain substantial and significant. Finally, we ad-dress the problem of simultaneous equations, omitted variables and heteroskedasticity, and adjust our data accordingly. We confirm our previous findings. Our tests provide evidence in favour of parameter insta-bility, again signifying the existence of contagion arising from problems in the Czech Republic affecting Hungary during much of 1996.

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Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 31 (2007)
Issue (Month): 1 (March)
Pages: 71-96

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Handle: RePEc:eee:ecosys:v:31:y:2007:i:1:p:71-96
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