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Integration of Central and Eastern European and the Euro-Area Financial Markets: Repercussions from the Global Financial Crisis

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Abstract

We examine integration of financial markets and banking sectors in Central and Eastern Europe and the euro area. We study co-movements between government bond and equity markets of Germany and those of Poland, Czech Republic, Hungary, as well as Slovenia and Slovakia (the two recent euro members). We assume that financial integration is essential for subsequent monetary convergence, as it will enable the euro candidates to mitigate systemic risk and avert potentially destabilizing shocks. Government bond yields of the Czech Republic and Poland show high correlation with German yields, in contrast to those of the remaining countries. Equity returns of Slovenia and Slovakia show no correlation with German returns, while those of the three euro candidates show high correlation. The banking sectors of the Czech Republic and Poland show higher integration with the euro area than do Slovakia and Slovenia, while Hungary, dominated by country-specific shocks, lags behind all the others.

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Notes

  1. See Golinelli and Rovelli (2005) and Orlowski (2005, 2008) for a detailed description of inflation targeting policies, their transmission mechanisms and repercussions for sovereign bond markets in CEE.

  2. See Gabrisch et al. (2012) for further evidence on the key drivers of elevated sovereign risk premia in the euro-periphery and the euro-candidate countries.

  3. We assume that the global financial crisis began with the collapse of two hedge funds managed by Bear Stearns in mid-August 2007 (see Orlowski, 2008 for further explanation). That triggered a subprime mortgage crisis in the United States and subsequently the global credit crunch and the systemic crisis that peaked with the collapse of Lehman Brothers in September of 2008.

  4. By definition, frontier equity markets are those that have lower market capitalization and liquidity than the more developed markets, thus they attract investors seeking higher long-term returns as these markets exhibit low correlation with the larger markets. See for instance Amin and Orlowski (2014) for a detailed analysis of low correlations of returns between South Asian frontier markets and the leading global equity markets. Although the term ‘frontier markets’ is normally applied to emerging financial markets, their characteristics seem to fit to the low-capitalized euro-periphery markets that attract similar type of investors from the more developed core euro area markets.

  5. For the evolution of the CEE banking sector, see Bonin et al. (2013).

  6. Data source: the ECB’s Statistical Data Warehouse, http://sdw.ecb.europa.eu/browse.do?node=9484266.

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Authors and Affiliations

  1. Department of Economics and Finance, Sacred Heart University, 5151 Park Avenue, Fairfield, CT 06825, USA

    Lucjan T Orlowski

  2. Moscow State Institute of International Relations, Moscow, The Russian Federation,

    Anna Tsibulina

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  1. Lucjan T Orlowski
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  2. Anna Tsibulina
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Orlowski, L., Tsibulina, A. Integration of Central and Eastern European and the Euro-Area Financial Markets: Repercussions from the Global Financial Crisis. Comp Econ Stud 56, 376–395 (2014). https://doi.org/10.1057/ces.2014.16

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  • DOI: https://doi.org/10.1057/ces.2014.16

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