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Interdependence between stock and exchange rate markets in former communist economies

Author

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  • Dejan Živkov
  • Slavica Manić
  • Marina Gajić-Glamočlija

Abstract

This study explores the short-term interconnection between stock and foreign exchange markets in five post-communist countries – Poland, Czechia, Hungary, Romania, and Kazakhstan, with a focus on assessing whether their relationship conforms more closely to the flow-oriented model or the portfolio-balance framework. Utilising a bivariate cDCC-GJR-GARCH approach, the analysis creates daily time varying correlations. To further investigate how market volatilities influence these correlations, a nonlinear smooth transition regression model is applied. Findings from the cDCC model reveal consistently negative correlations in all countries, supporting the portfolio-balance hypothesis as the prevailing dynamics in the short run. The smooth transition regression model uncovers regime dependent behaviour, showing that transitions between low- and high-volatility environments are common. The transitions are typically driven by fluctuations in exchange rate volatility, and in two instances, by stock market volatility. In most cases, increased volatility in both markets weakens the correlation between the two assets, indicating a negative spillover effect.

Suggested Citation

  • Dejan Živkov & Slavica Manić & Marina Gajić-Glamočlija, 2026. "Interdependence between stock and exchange rate markets in former communist economies," Post-Communist Economies, Taylor & Francis Journals, vol. 38(5), pages 566-593, July.
    • Handle: RePEc:taf:pocoec:v:38:y:2026:i:5:p:566-593
    DOI: 10.1080/14631377.2026.2666050
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