Financial Contagion in Central and Eastern European Capital Markets: The Case of Russia’s Invasion of Ukraine

Abstract

Russia invaded Ukraine on February 24th, 2022, marking a steep escalation of the Russo-Ukrainian War, which began in 2014 after the Ukrainian Dignity Revolution. The invasion caused Europe’s largest refugee crisis since World War II, with more than 5.5 million Ukrainians leaving the country and a quarter of the population displaced. At the outbreak of war in 2014, Russia annexed Crimea and Russian-backed separatists who par­ticipated in the south-eastern Donbas region of Ukraine, starting a regional war there. Considering these events, it is relevant for policymakers and reg­ulators to understand how contagious crises are to take appropriate meas­ures to prevent or contain the side effects. To verify the levels of contagion or interdependencies we use Pindyck and Rotemberg’s t-statistic, as well as Forbes and Rigobon’s t-test, which suggests that we are facing extreme vol­atility in the capital markets analysed, and financial contagion is very sig­nificant. In conclusion, the capital markets analysed mostly show that cor­relations have increased in this period of uncertainty in the global economy (Russian invasion in Ukraine), evidencing that investors will find it difficult to diversify risk in these markets. The authors believe that the results achieved represent interest for investors seeking opportunities in these stock markets, and for policymakers to undertake institutional reforms to increase stock market efficiency and promote sustainable growth in financial markets. These findings also open room for market regulators to take steps to ensure better information in these regional markets