Volatility and asymmetric dependence in Central and East European stock markets

Nathan Lael Joseph, Thi Thuy Anh Vo, Asma Mobarek, Sabur Mollah

Research output: Contribution to journalArticlepeer-review

Abstract

We study the effects of contagion around the global financial crisis (GFC) and the Eurozone crisis periods using German and UK returns, each paired with returns from Central and East European (CEE) stock markets that recently joined the European Union (EU). Using bivariate vector error-correction models (VECMs) estimated in GARCH(1,1), we find strong support for long-run equilibrium conditions. This finding suggests that tests of tail dependence using differenced VARs may be mis-specified when long-run equilibrium conditions apply. Past news has more persistence on current volatility in CEE markets than in the developed markets. Past volatility has more persistence in the developed markets compared to the CEE markets. The T-V symmetrized Joe–Clayton (T-V SJC) copula outperforms all other copulas in goodness-of-fit, including, the T-V Gaussian and Student t copulas. This result is supported by a differenced VAR-GARCH (1,1). For CEE and developed market returns, no more than half of our market pairs exhibit significant increases in lower tail dependence, under the T-V SJC copula. Given the number of paired comparisons, the evidence on joint extreme dependence is weak. As such, CEE stock markets experienced little contagion effects during the GFC and Eurozone crisis periods, contrary to prior results. We find that the legal environment negatively impacts financial development, perhaps causing CEE and the EU markets to be isolated.
Original languageEnglish
Pages (from-to)1241-1303
Number of pages63
JournalReview of quantitative finance and accounting
Volume55
Issue number4
Early online date18 Mar 2020
DOIs
Publication statusPublished - 1 Nov 2020

Bibliographical note

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Keywords

  • Cross-country contagion
  • Eurozone crisis
  • GARCH
  • Global financial crisis
  • Time-varying copula functions
  • Vector error-correction models

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