Financial Linkages and Shock Spillovers in the Countries of Central, Eastern, and South-Eastern Europe

Abstract

At the start of the third decade of the 21st century, the countries of Central, Eastern, and South-Eastern Europe (CESEE) are still lagging behind ‘old' EU Member States in regards to various macroeconomic and social indicators. This is particularly evident when considering the development of the financial sector, especially the non-banking part. This chapter focuses on the stock markets of eleven CESEE countries and analyzes potential macroeconomic factors that contribute to explaining the dynamics of real equity prices. To account for cross-country linkages and potential spillovers, global vector autoregressive (GVAR) methodology is applied. The estimated impact elasticities enabled the pinpointing of CESEE countries with stronger linkages to foreign stock markets. Generalized impulse response functions indicated the existence of statistically significant spillovers, the strongest spillovers coming from the German stock market. The empirical results also showed spillovers from CESEE countries' stock markets, bond markets, as well as from real shocks.