Testing the Causal Relationship between Central and Eastern European Capital Markets: Evidence in Periods of Uncertainty in the Global Economy

Abstract

The purpose of this study is to examine the movements of capital markets in Austria (ATX), Serbia (BELEX 15), Hungary (BUX), Croatia (CROBEX), Russia (IMOEX), the Czech Republic (PRAGUE PX), Slovenia (SBI TOP), and Po­land (WIG) from September 18th, 2017 to September 15th, 2022. To obtain more robust results, we divide the sample into two sub-periods: the Quiet period, from September 18th, 2017, to December 31st, 2019; and the Stress Period, from January 1st, 2020, to September 15th, 2022, marked by the global pandemic (COVID-19), the oil price war in 2020, and the Russian invasion in 2022. The time series exhibit non-normal distributions due to the presence of fat tails, a characteristic that is common in periods of extreme volatility. The results of the VAR Granger Causality/Block Exogeneity Wald Tests model verified the existence of 16 pairs of markets showing co-movements between them dur­ing the quiet subperiod. The market that causes more co-movements is the Austrian stock market (ATX), while the Russian stock index (IMOEX) does not cause shocks in the markets under analysis. In the Stress subperiod, we ver­ify the presence of 42 pairs of markets causing (each other in the Grangeri­an sense. The stock indexes ATX, BUX, CROBEX, and PRAGUE PX show 6 caus­al relations in 7 possible, while the capital markets of Russia (IMOEX) and Po­land are the ones that cause less (4 in 7 possible). In conclusion, we verify that the events that occurred in 2020 and 2022 have significantly increased the movements in these regional markets. Such findings could put into question the implementation of efficient portfolio diversification strategies and even­tually some gains above the market average due to arbitrage levels. The au­thors consider this evidence to be relevant for supervisors, regulators, and in­vestors operating in these regional markets.