Stock market
The CEE countries lag behind the rest of member states in the European region by a large margin in terms of financial depth. On average, the ratio of domestic credit to the private sector as a percentage of GDP in the CEE new member states stood at slightly more than 30 percent in 2003, compared to the EU-15 average of around 120 percent. We were able to observe an improvement in the degree of financial intermediation over the past decade. Strong economic growth, structural reforms in the financial sector and progress in the privatization of banks benefited this process in most countries. In addition, bond and equity markets continue to be relatively small in the member states in CEE, both in absolute terms and in relation to GDP.
Figure 1 GDP, billion currency units Source: World Development Indicators
The equities exchanges of Central and Eastern Europe are relatively small emerging and frontier markets. The largest market among them, the Zagreb Stock Exchange, is comparable in size and market turnover to the smallest Budapest stock exchange.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
GDP (in millions of US dollar)
Hungary Czech Republic Poland Romania Croatia
21
The worldwide market downturn since 2000 has influenced CEE exchange in terms of market capitalization and trading volume as it has all other exchanges in the world. The effects, however, are felt much more by CEE exchanges and raises the question of whether these exchanges can be important to CEE economies and particularly in terms of corporate finance in these countries. To assess the current stage of development of CEE securities markets in stocks and exchange markets, we look at these markets from various perspectives and compare them with other West European markets.
Figure 1 gives an overview of the important characteristics of CEE stock markets between 2008 and 2017. The graph shows that CEE stock exchanges are still relatively small. All CEE stock exchanges not only show low market capitalization but also are relatively important to the economy. This can be seen from the relation of market capitalization to GDP. In general, the selected stock markets have a capitalization of only lowest 7 percent (Romania) and largest 42 percent (Croatian) relative to GDP. This means that only a small fraction of the total value of CEE companies is traded at the stock exchanges. There is now a large gap between these still-developing stock markets and the CEE stock markets.
Figure 2 Stock market capitalization as percent of GDP in CEE countries
0 5 10 15 20 25 30 35 40 45
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Stock market capitalization (% of GDP)
Axis Title
Hungary Czech Republic Poland Romania Croatia
22 Source: World Development Indicators
Another significant characteristic of stock market is liquidity, which is often measured as the ratio of market turnover to market capitalization (Figure 2). This ratio indicates how often the total value of stocks is turned over on average during a year. A high ratio reveals that the market is relatively liquid. This is particularly important with respect to the usually large orders of institutional investors. The five CEE stock markets have slightly low turnover ratios.
Figure 3 Stock market turnover ratio Source: World Development Indicators Foreign exchange market
The evolution of exchange rates currently illustrates a significant source of concern from both a micro and a macroeconomic perspective. The exchange rate is one of the most synthetic prices in an economy and it is also the expression of a general equilibrium among the market for real goods and services, the currency market and capital market, which has the apparent potential of effecting the general economic equilibrium in any economy. The behaviour of the exchange rate is influenced, at
0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Market turnover (% of capitalization)
Axis Title
Hungary Poland Croatia Romania Czech
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its turn, by the degree of economic growth, the changes in the general level of prices, the industry structure of the economy, the country’s level of international competitiveness and its degree of trade and financial openness, the political stability and government’s ability to deal with internal crises which would occur. This diversity of determinants that impact directly or indirectly the exchange rate raises the issue of the easiness of managing such a complex and dynamic macroeconomic variable.
Over the past several decades, the number of countries running de jure floating exchange rate regimes has steadily grown. In some influential papers show that there is a discrepancy between de jure and de facto, and countries appear to actively restrict fluctuations in the external value of their national monies.
The diversity in the exchange rate regime choices also reflects different stabilization strategies and the availability of alternative monetary policy frameworks. Achieving price stability still remains the main stabilization task. The exchange rate regimes of the former communist countries in the region are quite diverse, ranging from stabilized arrangement to free floating. This diversity can be explained by the structural diversity of these countries, on one hand, and by the need felt by these countries to better control inflation and exchange rates at the same time. In general, there are some substantial differences for some countries and some years. We observed the volatility of exchange rates and stock indices of these countries currencies against the US dollar over the same time span. (see Figure 4) Table 2 Exchange rate regimes in 5 CEE countries, 2008-2014
2008 2009 2010 2011 2012 2013 2014
Croatia 8 4 6 6 6 6 6
Czech Republic 10 10 10 10 10 8 4
Hungary 9 9 9 9 9 9 9
Poland 10 10 10 10 10 10 10
Romania 9 9 9 9 9 9 9
Notes: 4= Stabilized arrangement; 6=Craw-like arrangement; 7=Managed floating with no pre-determined path for the exchange rate; 8=Other managed arrangement;
9=Floating; 10=Free floating
Source: IMF’s Annual report on exchange arrangement and exchange restrictions
24 (a) Daily foreign exchange prices
2.0 2.4 2.8 3.2 3.6 4.0 4.4
08 09 10 11 12 13 14 15 16 17
Poland
160 180 200 220 240 260 280 300 320
08 09 10 11 12 13 14 15 16 17
Hungary
25 2.0
2.4 2.8 3.2 3.6 4.0 4.4
08 09 10 11 12 13 14 15 16 17
Romania
16 18 20 22 24 26 28
08 09 10 11 12 13 14 15 16 17
Czech
26
4.5 5.0 5.5 6.0 6.5 7.0 7.5
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Croatia
(b) Daily stock prices
8,000 12,000 16,000 20,000 24,000 28,000 32,000 36,000 40,000
08 09 10 11 12 13 14 15 16 17
Hungary
27 1,000
2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000
08 09 10 11 12 13 14 15 16 17
Romania
1,200 1,600 2,000 2,400 2,800 3,200 3,600
08 09 10 11 12 13 14 15 16 17
Croatia
28 600
700 800 900 1,000 1,100 1,200 1,300 1,400 1,500
08 09 10 11 12 13 14 15 16 17
Czech
20,000 30,000 40,000 50,000 60,000 70,000
08 09 10 11 12 13 14 15 16 17
Poland
Figure 4 Foreign exchange and stock prices, 2008-2017
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THE DYNAMICS OF VOLATILITY SPILLOVER BETWEEN STOCK AND FOREIGN EXCHANGE MARKETS:
EMPIRICAL EVIDENCE FROM CENTRAL AND EAST EUROPEAN COUNTRIES
1We use an Exponential Generalised Autoregressive Conditional Heteroskedasticity (EGARCH) model to investigate the asymmetric volatility spillover effects between the stock markets and foreign exchange markets in Hungary, Poland, the Czech Republic, Romania and Croatia for the periods before and after the financial crisis. The study covers the entire period from 1 April 2000 to 29 September 2017.
The results reveal bidirectional volatility spillover between the stock and foreign exchange markets of Hungary in all periods, and of Poland in the post-crisis period, unidirectional volatility spillover in Croatia in the pre-crisis period, and from the stock market to the exchange market in the Czech Republic during two periods. In the post-crisis period, the two financial markets show the absence of volatility spillover in Croatia. Furthermore, empirical results from our analysis provide valuable insights to investors, multinational companies and economic policymakers regarding financial decision-making.
JEL: C15; F31; G15
Keywords: volatility spillover, Central and East European countries, ARCH, GARCH, EGARCH, exchange rate, stock market
1Hung, N.T (2019). Dynamics of volatility spillover between stock and foreign exchange market:
empirical evidence from Central and Eastern European Countries. ECONOMY AND FINANCE:
ENGLISH-LANGUAGE EDITION OF GAZDASÁG ÉS PÉNZÜGY, 6(3), 244-265.
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