CORRELATION AND VOLATILITY IN CENTRAL AND EASTERN EUROPEAN STOCK MARKETS

Our paper investigates the extent of capital market co-movements between three emerging markets from the European Union - Czech Republic, Hungary and Poland - and three developed markets from the European Union, namely Austria, France and Germany. Since the general perception, also supported by empirical evidence, is that an integration process should be observable at the level of higher correlations between countries' capital markets, we test whether such an increase in correlations between the six markets above took place in the recent years. At the same time, we explore the link between correlations and stock market volatilities in this sample of countries. We find that there is an observable and statistically significant positive trend in cross-market correlations between 1999 and 2008, with an increase in correlations over the ten year period ranging from 13.2% to 59.3%. We find that correlations between the three emerging markets and the three developed markets increased on average between 1999 and 2008, which may indicate a higher integration of these capital markets. At the same time, we observe that movements in national stock markets are not fully synchronized, but correlations tend to be high in periods of high market volatility, as measured by the standard deviation of stock market returns. Regressing the rolling correlations on markets rolling volatilities, we find that almost all coefficients are statistically significant and positive, which indicates that increases in market volatilities lead to increases in cross-country correlations during the ten years under analysis. Our findings confirm previous studies and lead to the conclusion that stock markets from Central and Eastern Europe became more integrated with the developed markets in European Union, as revealed by the evolution of correlations between these markets. Still, this result needs more exploration, which we intend to conduct in further research.