Influence of the EU Accession Process and the Global Crisis on the CEE Stock Markets: A Multivariate Correlation Analysis

The paper examines the long-term dynamics of four Central and Eastern European countries, namely the Czech Republic, Hungary, Poland and Romania between 2002 and 2012. The structure of the paper is twofold. In the first part, it examines the relationship between a set of macro financial variables, the main stock indices of Western Europe (MSCI EAFE indices, United Kingdom, Germany, Austria) and the stock market indices of four Central and Eastern European countries using a Vector Autoregressive model. The VAR model showed that during the global financial crisis there was an increased impact of the macroeconomic factors on the financial returns of the CEE countries. In the second part, the paper explores the conditional correlations of the index returns between Western Europe and the CEE countries using multivariate GARCH models. By investigating the stock market co-movements of the countries that have recently joined the European Union with the developed European capital markets, we may see that the level of correlation across markets has significantly increased after joining the European Union. During the 2008-2009 global financial crisis, the indices displayed a high conditional correlation indicating that the financial shocks had simultaneously hit all the regional Stock Exchanges. In the period after the crisis, the BEKK model showed evidence of the spillover effects generated by the sovereign debt crisis over the CEE countries.