Research Discussion Papers, Bank of Finland
Terhi Jokipii and Brian Lucey
Contagion and interdependence: measuring CEE banking sector co-movements
Abstract: Making use of ten years of daily data, this paper examines
whether banking sector co-movements be-tween the three largest Central and
Eastern European Countries (CEECs) can be attributed to contagion or to
interdependence. Our tests based on simple unadjusted correlation analysis
uncover evidence of conta-gion between all pairs of countries. Adjusting
for market volatility during turmoil, however, produces dif-ferent results.
We then find contagion from the Czech Republic to Hungary during this time,
but all other cross-market co-movements are rather attributable rather to
strong cross-market linkages. In addition, we construct a set of dummy
variables to try to capture the impact of macroeconomic news on these
markets. Controlling for own-country fundamentals, we discover that the
correlations diminish between the Czech Republic and Poland, but that
coefficients for all pairs remain substantial and significant. Finally, we
ad-dress the problem of simultaneous equations, omitted variables and
heteroskedasticity, and adjust our data accordingly. We confirm our
previous findings. Our tests provide evidence in favour of parameter
insta-bility, again signifying the existence of contagion arising from
problems in the Czech Republic affecting Hungary during much of 1996.
Keywords: contagion; interdependence; macroeconomic news; banking sector; stock returns; (follow links to similar papers)
JEL-Codes: F30; F40; G15; (follow links to similar papers)
47 pages, July 3, 2006
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