Episodic dependencies in Central and Eastern Europe stock markets

Abstract

This article introduces a modified version of the Hinich and Patterson (1995) windowed-test procedure and uses it to detect linear and nonlinear dependencies in the case of six Central and East European stock markets. Testing the original methodology leads us to the same conclusions as those found on other emerging markets: relatively long random walk periods are interrupted by short and intense linear and/or nonlinear correlations. But, our findings diverge when we run the modified test procedure, additional windows rejecting the random walk hypothesis (RWH) being isolated. This divergence, heavily weighing the task of correctly evaluating the informational efficiency degree (the weak form), is significant for the Czech, Hungarian and Romanian markets.

Acknowledgements

The authors acknowledge Professors Timo Teräsvirta and Władysław Milo for useful comments and suggestions on an earlier draft on this article. We are also benefited from conversations with Professor Joseph Plasmans and other participants at the 5th Annual International Conference Forecasting Financial Markets and Economic Decision-Making' in Łodz (Poland, 11–13 May 2006).