How Important is the Contagion Effect for the Romanian Capital Market?

Significant turbulences occurring in the world capital markets, starting with 2007, emphasized the presence of contagion between the markets, with consequent spillover of the volatility from one market to the other. The contagion effect between different markets is of great interest for a broad range of economists, as the concept became more popular after the most recent financial crisis. In this article, we aim to assess the proportion of the volatility of the Romanian capital market’s returns that is due to the interaction with 10 other capital markets around the world, by using a methodology proposed by Diebold and Yilmaz (2008). We calculate volatility indexes for daily, weekly and monthly data, in order to capture the impact the developed capital markets have on less developed capital markets. The obtained results confirm the role the financial contagion plays in the spreading of volatility among different countries, especially from the more developed to the less developed markets. In the case of the Romanian capital markets, the more developed capital markets have a major impact on the volatility of returns, as shown by corresponding part of the spillover index, with the contagion effect being most revealed by using monthly data (with a value of 68.88%), then weekly data (49.24%) and, in the daily data case, the index has the lowest value (34.32%). This result confirms the need for an international stance on the supervising the financial markets in the European Union, in order to monitor and take preemptive actions that consolidates the markets’ resilience to shocks. In the Romanian capital market case, it is shown the need to start a reform that lead to strengthen its place as a financing venue for the Romanian companies, especially considering the perspective of the Capital Markets Union process intended to be initiated starting early 2019.