Risk connectedness of selected CESEE stock markets: a spillover index approach

Tihana Škrinjarić · Boško Šego

20 citations0/0 files storedChina Finance Review International

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Financial Risk and Volatility Modeling Global Financial Crisis and Policies Market Dynamics and Volatility

Abstract

Purpose The purpose of this paper is to empirically evaluate risk spillovers between selected CESEE (Central, Eastern and South-Eastern Europe) stock markets in order to evaluate the possibilities of an international diversification of a portfolio. Design/methodology/approach The VAR model and the Diebold and Yilmaz (2009, 2012) spillover index are used, with rolling indices estimation over time in order to observe dynamics, which is important for investment strategies. Data are monthly and include selected CESEE stock market indices which were available to the researcher. Findings The empirical analysis for the period of January 2012–June 2019 indicates that some country risks were the net emitter of shocks in the system (Slovenia and Czech Republic), whereas some were net receivers (Croatia and Ukraine). The results are robust with respect to changing the length of the rolling window analysis, which means that investors could utilize such an approach in a dynamic portfolio selection. Research limitations/implications Observing only selected markets due to data (un)availability. Practical implications The paper shows how international investors can utilize the aforementioned methodology in order to make a more detailed analysis of the dynamics of stock markets connectedness so that international portfolios can be rebalanced according to the results and investors’ preferences. Originality/value This is the first such research which focuses on CESEE countries, since existing research is focused on more developed stock markets. Moreover, the empirical analysis extends to commenting the pairwise net indices over time, which is important for the dynamic portfolio rebalancing over time.

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References

1998Generalized impulse response analysis in linear multivariate models 2011Better to give than to receive: Predictive directional measurement of volatility spillovers 2008Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets 2001Extreme Correlation of International Equity Markets 1982Measurement of Linear Dependence and Feedback Between Multiple Time Series 1995Is the correlation in international equity returns constant: 1960–1990?1997International Asset Pricing and Portfolio Diversification with Time-Varying Risk 1990Volatiltiy and Links Between National Stock Markets

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