Globalization or Regionalization of Stock Markets? the Case of Central and Eastern European Countries

Abstract

This article investigates the degree of financial integration of the Eastern European countries with global and regional financial markets and compares it with the core of the euro area. A Bayesian dynamic factor model was utilized to uncover global, regional and country factors driving the co-movement of rates of return of stock indexes. In the case of the Eurozone, the role of the country and international factor was extremely stable over the analyzed period. The composition of the international factor changed over time with the share of the global factor increasing during the time of the global financial crisis.

The share of the country factor in the EMU was around 10%, while it was around 20% in Visegrad 4, indicating very strong international ties between the capital markets.

Keywords:

• Central and Eastern Europe
• dynamic factor model
• globalization
• regionalization
• stock markets

JEL Classification:

• C38
• G15
• F36

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. See https://www.ecb.europa.eu/ecb/orga/escb/eurosystem-mission/html/index.en.html .

2. Share price returns in the local currencies are analyzed by Dooley and Hutchison (2009), even though they separately analyze exchange rate variability during the crisis. Adam et al. (2002) compare both approaches before and directly after the introduction of the euro and show that these measures are very close to each other although taking exchange rates into consideration slightly decreases correlations. Wälti (2011) analyzes correlations of returns of stock indices in the local currency but shows that smaller variability of bilateral exchange rates increases the observed correlation of share prices. Berben and Jos Jansen (2009) as well as Bénétrix and Wälti (2011) or Beine and Candelon (2011) take into consideration stock price returns expressed only in local currencies.

3. See Bai and Wang (2015) for a review of Bayesian dynamic factor models.

Additional information

Funding

This research received financial support from the resources granted to the Faculty of Economics and International Relations of the Cracow University of Economics as a part of the subsidy for the maintenance of the research potential.