آنالیز همبستگی دینامیکی سرایت بیماری مالی: شواهدی از بازارهای مرکزی و اروپای شرقی

This paper applies the Dynamic Conditional Correlation (DCC) multivariate GARCH model of Engle (2002), in order to examine the time-varying conditional correlations to the weekly index returns of seven emerging stock markets of Central and Eastern Europe. We used weekly data for the period 1997–2009 in order to capture potential contagion effects among the US, German and Russian stock markets and the CEE stock markets. The main finding of the present analysis is that there is a statistically significant increase in conditional correlations between the US and the German stock returns and the CEE stock returns, particularly during the 2007–2009 financial crises, implying that these emerging markets are exposed to external shocks with a substantial regime shift in conditional correlation. Finally, we demonstrated that domestic and foreign monetary variables, as well as exchange rate movements have a significant impact on the corresponding conditional correlations. Macroeconomic fundamentals have been shown to have substantial explanatory power in explaining these conditional correlations during the financial crisis of 2007–2009.

It is well documented that stock return correlations vary over time. According to Ang and Bekaert (1999) and Longin and Solnik, 1995 and Longin and Solnik, 2001, correlations among market returns tend to decline in bull markets and to rise in bear markets. Moreover, the fact that international stock market correlation is significantly higher during the periods of volatile markets (i.e. stock market crises periods) has become the accepted perception (Lin, Engle, & Ito, 1994). The global scale of the October 1987 stock market crash, the Asian crisis in 1997, and the Russian default in 1998 have created a growing impetus among researchers and policy makers to investigate the various aspects of international stock market relations, since the findings are significant both in application of passive and active international investment strategies and the identification of the channels of shock spreading from one market to the other. Low international correlation across markets is the starting place of global portfolio diversification strategy (Lessard, 1973 and Solnik, 1974). If correlations between stock returns are high, a loss in one stock is likely to be accompanied by a loss in other stocks as well. Therefore, diversification benefits are greater when the correlation between the stock returns is low. On the other hand, the identification of significantly increased correlation of stock market returns can be regarded as evidence of existence of the contagion effect.1 The main body of the current literature explores the links among the developed stock markets (Hamao et al., 1990, Theodossiou and Lee, 1993, Longin and Solnik, 1995, Meric and Meric, 1997, Goetzmann et al., 2001, Cappiello et al., 2006 and Kim et al., 2005), while some recent studies have extended this line of research to the linkages between the emerging and developed stock markets (Bekaert, 1995, Bekaert and Harvey, 1995, Chen et al., 2002, Yang, 2005, Chiang et al., 2007 and Phylaktis and Ravazzolo, 2005). However, even though most of the aforementioned studies have focused on emerging markets in Asia and Latin America, evidence on stock market linkages in the emerging markets in Central and Eastern Europe, remains relatively limited. Gelos and Sahay (2000) investigated the impact of various external crises on Central and Eastern European (CEE) stock markets. They found increased financial market correlation since 1993, particularly around the time of the 1998 Russian crisis. The Hungarian market appeared to be highly affected by that crisis. This finding is consistent with Schotman and Zalewska (2006) who documented that the Hungarian market was the most, and the Czech market the least, sensitive to the 1997 Southeast Asian and 1998 Russian crises, a finding that may be explained by the fact that of the three emerging markets discussed in that study the Hungarian market had the highest foreign share ownership level and the Czech market the lowest. Moreover, Wang and Moore (2008) documented a higher level of stock market correlation between three emerging CEE markets and the aggregate eurozone market during the period after the Asian and Russian crises and also during the post-entry period to the European Union. Furthermore, Gilmore and McManus (2002) examined the short- and long-term relationships between the US stock market and three CEE emerging markets (Hungary, Poland, and Czech Republic) over the 1995–2001 period they found that low short-term correlations between the CEE markets and the US existed, whereas the application of the Johansen cointegration procedure indicated that there is no long-term relationship among them. Additionally, Scheicher (2001) found evidence of limited interaction between some of the CEE markets and the major markets for daily stock market volatility. Voronkova (2004) showed the existence of long-run links between the UK, the German, the French and three Central European stock markets (Hungary, Poland, and Czech Republic), using daily data for the period 1993–2002, provided that structural changes are properly accounted for. In a similar vein, Syriopoulos, 2004 and Syriopoulos, 2007 documented the existence of a long-run relationship between the US, the German and four CEE stock markets (Hungary, Poland, Czech Republic and Slovakia), using Johansen's cointegration methodology over the period between 1997 and 2003, whereas he argues that CEE markets tend to display stronger linkages with their mature counterparts rather than their neighbors. Lucey and Voronkova (2008) examined the existence of Russian equity market linkages with several developed stock markets as well as with the equity markets of Hungary, the Czech Republic and Poland before and after the 1998 crisis. They employed alternative cointegration techniques using data up to 2004 and concluded that Russia does not show strong evidence of increased long-run convergence, either with regional or developed markets. However, when they examined the existence of short-run linkages using the DCC–GARCH model, they showed that conditional bivariate correlations have increased in the post-crisis period as compared to the pre-crisis period. Finally, Syllignakis and Kouretas (2010) provided evidence that the stock markets of the Central and Eastern European countries are partially integrated with the mature US and German stock markets, since they share a significant common permanent component which drives the system of these stock exchanges in the long-run, with the Estonian market appearing to be segmented. Furthermore, they also argued that the 2007–2009 global financial turmoil had a negative effect on the convergence process. The issue of contagion among stock markets has come to the surface once again as a result of the financial crisis of 2007–2009. The CEE countries have been hit dramatically by the events that originated in the US sub-prime mortgage market that eventually turned into a credit and financial crisis. Thus, as a result of the 2007–2009 financial crisis, investors in the over borrowed speculative hedge funds and private equity and other institutional investors have withdrawn almost all their investments from the emerging markets and certainly from the CEE stock markets. Facing bankruptcy, these institutional investors moved to liquidate most of their stocks, bonds and currencies from the CEE and other emerging markets and invested instead in safer assets like US government bonds. As a result, the stock markets of the CEE countries lost over 50% of their value between June 2008 and November 2008 while their currencies have been devalued substantially. Hungary is the country which was hit hardest by the crisis and faced severe economic and financial problems. It had a huge current account deficit and was forced to raise its basic interest rate from 8.5% to 11.5% in an effort to prevent the depreciation of the Hungarian fiorin. However, this intervention policy did not work and its currency continued to depreciate against the euro and the dollar. This fall in value of the domestic currency resulted in a substantial increase in the value of its external debt, forcing Hungary to ask for a 16.5 billion dollar loan from the IMF and another 5 billion euro loan from the ECB in an attempt to ease the severe consequences for its economy. Almost all other CEE economies faced significant problems. Estonia also faced an economic recession whereas the Romanian currency depreciated from May 2008 to November 2008 as a result of the substantial increase in its budget deficit, its current account deficit and its external debt which led to the reduction of its credit ratings by Standard and Poor's and Fitch. Even the currencies of Poland and the Czech Republic, which in the previous years were quite stable, went under substantial pressure due to the capital flight which led to a reduction in their values against the euro. Eichengreen and Steiner (2008) argued that part of the problem during this and past financial crises was the creation of liabilities that were denominated in foreign currency. Although some emerging economies have understood after the crises of 1994–2002 the negative effects that currency mismatches can create, several CEE countries borrowed in foreign currency during the subsequent cycle. This mistake was repeated by Hungary and to a lesser extent by Poland. Eichengreen and Steiner (2008) interpreted these transactions as a failed “convergence play” among CEE countries considered to be on the path to joining the euro, which resulted in another episode of the carry trade observed in foreign exchange and money markets during the last five years. This paper makes a number of contributions to the relevant literature. First, to the best of our knowledge this is the first study that examines the issue of contagion for the stock markets of the CEE economies using data for the 2007–2009 financial turmoil. Second, while previous studies on the subject used a small sub-group of the CEE economies, we extend our analysis to a larger number of CEE economies with substantial diversity. Third, we employ the Dynamic Conditional Correlation (DCC) multivariate GARCH models developed by Engle (2002) to investigate the pattern of short-run interdependencies and to examine potential channels of contagion effects between the CEE and the US, German and Russian stock markets.2 To this end we focus on the impact that the 1997–1998 Asian and Russian financial crises, the 2000–2002 dot-com bubble, and the 2007–2009 financial crisis had on the CEE stock markets. A final novel feature of the present study is provided by a thorough analysis of the potential macroeconomic factors that explain the changes in the correlation patterns across countries and time. Several important findings stem from our analysis. First, the examination of the estimated correlation coefficients between the stock returns of the US and German stock markets and the corresponding returns of the CEE stock markets were statistically significant, providing evidence in favor of the influential role of these two mature markets on the CEE emerging stock markets. By contrast the Russian stock market had limited influence on the stock returns of the CEE markets. Second, the estimated correlation coefficients exhibited significant variation throughout the sample and in particular around the recent 2007–2009 financial turmoil. Third, the analysis of the dynamic correlation coefficients provided substantial evidence of the existence of contagion effects due to herding behavior during the period of the 2007–2009 stock crash, and in particular in the second half of 2008. This herding behavior may be attributed to the increased participation of foreign investors in the CEE stock markets, as well as to the increased financial liberalization, particularly after the accession of the CEE countries to the European Union in 2004. Fourth, the rolling regression analysis of the conditional correlations with the conditional volatility provided further evidence of the presence of contagion effects around the peak of the financial crisis in October 2008. Finally, we were able to identify several macroeconomic factors that may explain the time-varying nature of the conditional correlations. It is important to note that macroeconomic fundamentals played a key role in explaining the stock market correlations during the 2007–2009 financial turmoil. The rest of the paper is organized as follows. In Section 2 we discuss the financial liberalization process and market characteristics of the CEE economies. Section 3 presents the data employed and discusses the empirical results and Section 4 provides our conclusions.

In this paper, we used the multivariate DCC–GARCH model to investigate the existence of short-run interrelationships between the stock market returns of the US, Germany and Russia and those of the Czech Republic, Estonia, Hungary, Poland, Romania, Slovakia and Slovenia, by employing weekly stock-price data for the period October 1997 to February 2009. The estimated conditional correlation coefficients demonstrate significant variation in the conditional correlations throughout the sample and particularly around periods of financial distress like the recent stock market crash (2007–2009). This finding supports the use of the Dynamic Conditional Correlations approach as the appropriate framework to investigate the existence of increased correlation patterns during periods of financial turmoil, as well as of the potential channels of contagion effects. The analysis of the dynamic correlation coefficients provided substantial evidence in favor of contagion effects due to herding behavior in the financial markets of the Central and Eastern European emerging markets, particularly around the 2007–2009 financial turmoil. On the contrary, for the cases of the Asian and Russian crises (1997–1998) and the dot-com bubble, the contagion effect hypothesis cannot be accepted throughout the cross section. The statistically highly significant effect on the conditional correlations during the recent stock market crash may be attributed to the increased participation of foreign investors in the CEE stock markets, as well as to increased financial liberalization, particularly after the accession of the CEE countries to the European Union in 2004. Further evidence in favor of contagion effects during the 2008 stock market crash was provided by the rolling regression analysis of the conditional correlations with the conditional volatility. The results reveal a significant positive βi coefficient, accompanied by an R2 of almost 100% on October 2008, when the volatility of the German market increased dramatically and correlation reached historically high levels. This result also implies that the usefulness of the Central and Eastern European stock markets as a diversification tool has diminished in the recent years. Finally, the rolling stepwise regression analysis of the conditional correlations applied to a set of variables that proxy the real and monetary convergence between the CEE economies and the German economy showed that there were periods like the recent financial turmoil (2007–2009) when the macroeconomic fundamentals played a key role in explaining the stock market correlations, while there were other periods in which the explanatory power of the fundamentals was limited. Specifically, we were able to detect strong evidence of a positive relationship between the monetary convergence and stock returns' correlation, while the impact of the factors that proxy the business cycle and the inflationary environment convergence were also found to be statistically significant but their sign varied substantially across the sample. These findings further suggest that the differences on the impact the 1997 Asian crisis and the 2007–2009 crisis had on the CEE stock markets may also be attributed to the different origin and type of the two crises. The 1997 Asian crisis started in Asia, specifically, in Thailand where the currency market collapsed, while the 2007–2009 global financial crisis started in the US when its sub-prime mortgage market, and subsequently banking markets, collapsed. The recent crisis was expected to be more related to the CEE markets than the earlier Asian crisis. The main findings of the paper are consistent with these different characteristics of the two crises.19