Integration in Central European capital markets in the context of the global COVID-19 pandemic

• Authors: Pedro Pardal , Rui Dias , Petr Šuleř , Nuno Teixeira , Tomáš Krulický

Abstracts

EN

Research background: Covid-19 pandemic had a strong impact on the economy and capital market. In times of crisis, it is important for investors to be able to diversify their investment portfolio in order to mitigate risk. However, the growing trend towards capital market integration may make it ineffective. Research on financial integration, during the Covid-19 period, has started to develop, mainly in major global capital markets. It is, therefore, important to extend this research to other capital markets. The purpose of the article: This contribution aims to analyze financial integration in the stock indexes of the capital markets of Austria (ATX), Slovenia (SBITOP), Hungary (BUDAPEST SE), Lithuania (OMX VILNIUS), Poland (WIG), the Czech Republic (PX PRAGUE), Russia (MOEX) and Serbia (BELEX 15), in the context of the global pandemic (COVID-19). Methods: To measure the unit roots in the time series, we used ADF, PP, and KPSS tests, and Clemente et al. (1998) test to detect structural breaks. To ana-lyse financial integration, we applied the Gregory and Hansen integration test, and to validate the robustness of results, we use the impulse-response function (IRF) methodology, with Monte Carlo simulations, as they provide a dynamic analysis generated from the VAR model estimates. Findings & Value added: The results suggest very significant levels of integration, which decreases the chances of portfolio diversification in the long-term. Evidence shows 47 pairs of integrated stock market indexes (out of 56 possible). The stock indexes ATX, BUDAPESTE SE, BELEX 15 show financial integration with all other indexes. On the contrary, the index of OMX VILNIUS shows only 3 integrations. Results also show that most of the significant structural breaks occurred in March 2020. The analysis of the relationship between markets, in the short term, shows positive/negative co-movements, with statis-tical significance and with a persistence longer than one week.

Keywords

EN

COVID-19; capital market; financial integration; portfolio diversification; financial crisis

• Publisher: Instytut Badań Gospodarczych
• Journal: Equilibrium. Quarterly Journal of Economics and Economic Policy
• Year: 2020
• Volume: 15
• Issue: 4
• Pages: 627-650

Dates

published

2020

Contributors

author

Pedro Pardal

• Polytechnic Institute of Setúbal

• https://orcid.org/0000000331873472

author

Rui Dias

• Polytechnic Institute of Setúbal

• https://orcid.org/0000000261383098

author

Petr Šuleř

• Institute of Technology and Business in České Budějovice

• https://orcid.org/0000000175620659

author

Nuno Teixeira

• Polytechnic Institute of Setúbal

• https://orcid.org/0000000179067731

author

Tomáš Krulický

• Institute of Technology and Business in České Budějovice

• https://orcid.org/0000000203782699

References

• Ali, M., Alam, N., & Rizvi, S. (2020). Coronavirus (COVID-19) ? An epidemic or pandemic for financial markets. Journal of Behavioral and Experimental Finance. doi: 10.1016/j.jbef.2020.100341.
• Aziakpono, M. J. (2006). Financial integration amongst the SACU countries: Evidence from interest rate pass-through analysis. Journal for Studies in Economics and Econometrics, 30(2), 1-23. doi: 10.1111/pirs.12550.
• Baruník, J., & Vácha, L. (2013). Contagion among Central and Eastern European stock markets during the financial crisis. Finance a Uver 63(5), 443-453.
• Bremus, F., & Kliatskova, T. (2020). Legal harmonization, institutional quality, and countries? external positions: A sectoral analysis. Journal of International Money and Finance, 107. doi: 10.1016/j.jimonfin.2020.102217.
• Caporale, G. M., Gil-Alana, L. A., & Poza, C. (2020). High and low prices and the range in the European stock markets: A long-memory approach. Research in International Business and Finance, 52. doi: 10.1016/j.ribaf.2019.101126.
• Carausu, N., Filip, B., Cigu, E., & Carmen, T. (2017). Contagion of capital markets in CEE countries: Evidence from Wavelet analysis. Emerging Markets Finance and Trade, 54(5). doi: 10.1080/1540496X.2017.1410129.
• Nicusor Dumitru ? Bogdan Florin Filip ? Elena Cigu ? Toderascu Sandu Carmen
• Clemente, J., Monta?és, A., & Reyes, M. (1998). Testing for a unit root in variables with a double change in the mean. Economics Letters, 59(2), 175-182. doi: 10.1016/S0165-1765(98)00052-4.
• Chiaramonti, D., & Maniatis, K. (2020). Security of supply, strategic storage and Covid19: Which lessons learnt for renewable and recycled carbon fuels, and their future role in decarbonizing transport? Applied Energy, 271. doi: 10.1016/j.apenergy.2020.115216.
• Cole, M. A., Elliott, R. J. R., & Liu, B. (2020). The impact of the Wuhan Covid-19 lockdown on air pollution and health: A machine learning and augmented synthetic control approach. Environmental and Resource Economics, 76(4), 553-580. doi: 10.1007/s10640-020-00483-4.
• Dias, R., da Silva, J. V., & Dionísio, A. (2019). Financial markets of the LAC region: Does the crisis influence the financial integration? International Review of Financial Analysis, 63, 160-173. doi: 10.1016/j.irfa.2019.02.008.
• Dickey, D., & Fuller, W. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057-1072. doi: 10.2307/1912517.
• Engle, R. F., & Granger, C. W. J. (1987). Co-Integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251. doi: 10.2307/1913236.
• Gregory, A. W., & Hansen, B. E. (1996). Residual-based tests for cointegration in models with regime shifts. Journal of Econometrics, 70(1), 99-126. doi: 10.1016/0304-4076(69)41685-7.
• Griffith, R., Levell, P., & Stroud, R. (2020). The impact of COVID?19 on share prices in the UK*. Fiscal Studies, 41(2), 363-369. doi: 10.1111/1475-5890.12226.
• Grigaliuniene, Z., Celov, D., & Hartwell, C. A. (2020). The more the Merrier? The reaction of euro area stock markets to new members. Journal of International Financial Markets, Institutions and Money, 66. doi: 10.1016/j.intfin. 2020.101195.
• Grubel, H. G. (1968). Internationally diversified portfolios: Welfare gains and capital flows. American Economic Review, 58(5), 867-868. doi: 10.1126/scien ce.151.3712.867-a.
• Hao, N., Wang, H. H., & Zhou, Q. (2020). The impact of online grocery shopping on stockpile behaviour in Covid-19. China Agricultural Economic Review, 12(3), 459-470. doi: 10.1108/CAER-04-2020-0064.
• Hašková, S., & Vochozka, M. (2018). Duality in cyclical trends in European Union confirmed. SAGE Open, 8(1), 1-7. doi: 10.1177/2158244017753268.
• Hoffmann, P., Kremer, M., & Zaharia, S. (2020). Financial integration in Europe through the lens of composite indicators. Economics Letters, 194. doi: 10.1016/j.econlet.2020.109344.
• Horák, J., & Krulický, T. (2019). Comparison of exponential time series alignment and time series alignment using artificial neural networks by example of prediction of future development of stock prices of a specific company. In J. Horák (Ed.). SHS web of conferences: innovative economic symposium 2018 - milestones and trends of world economy (IES2018). EDP Sciences: Les Ulis, France. doi: 10.1051/shsconf/20196101006.
• Horák, J., Vrbka, J., & Šuleř, P. (2020). Support vector machine methods and artificial neural networks used for the development of bankruptcy prediction models and their comparison. Journal of Risk and Financial Management, 13(3). doi: 10.3390/jrfm13030060.
• Horvath, R., & Petrovski, D. (2012). International stock market integration: Central and South Eastern Europe compared. SSRN Electronic Journal. doi: 10.2139/ ssrn.2078238.
• Jarque, C. M., & Bera, A. K. (1980). Efficient tests for normality, homoscedasticity and serial independence of regression residuals. Economics Letters, 6(3), 255-259. doi: 10.1016/0165-1765(80)90024-5.
• Johansen, S. (1988). Statistical analysis of cointegrated vectors. Journal of Economic Dynamics and Control, 12(2?3), 231-254. doi: 10.1016/0165-1889(88) 90041-3.
• Koop, G., Pesaran, M. H., & Potter, S. M. (1996). Impulse response analysis in nonlinear multivariate models. Journal of Econometrics, 74(1), 119-147. doi: 10.1016/0304-4076(95)01753-4.
• Krarup, T. (2019). Money and the ?level playing field?: the epistemic problem of European financial market integration. New Political Economy, 1-16. doi: 10.1080/13563467.2019.1685959.
• Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shinb, Y. (1992). Testing the null hypothesis of stationary against the alternative of a unit root. Journal of Econometrics, 54(1), 159-178. doi: 10.1016/0304-4076(92)90104-Y.
• Lăzăroiu, G., Horák, J., & Valášková, K. (2020). Scaring ourselves to death in the time of COVID-19: Pandemic awareness, virus anxiety, and contagious fear. Linguistic and Philosophical Investigations, 19, 114-120. doi: 10.22381/LPI1 920208.
• Lee, E.-J. (2017). Intra- and inter-regional portfolio diversification strategies under regional market integration: Evidence from U.S. global banks. International Review of Financial Analysis, 54, 1-22. doi: 10.1016/j.irfa.2017.08.001.
• Levy, H., & Sarnat, M. (1970). International diversification of investment portfolios. American Economic Review, 60(4), 668-675. doi: 10.2307/1818410.
• Liu, H., Manzoor, A., Wang, C., Zhang, L., & Manzoor, Z. (2020). The COVID-19 outbreak and affected countries stock markets response. International Journal of Environmental Research and Public Health, 17(8). doi: 10.3390/ijerph17082 800.
• Lucey, B. M., & Voronkova, S. (2008). Russian equity market linkages before and after the 1998 crisis: Evidence from stochastic and regime-switching cointegration tests. Journal of International Money and Finance, 27(8), 1303-1324. doi: 10.1016/j.jimonfin.2008.07.004.
• Lütkepohl, H., & Saikkonen, P. (1997). Impulse response analysis in infinite order cointegrated vector autoregressive processes. Journal of Econometrics, 81(1), 127-157. doi: 10.1016/S0304-4076(97)00037-7.
• Milos, L. R., Hatiegan, C., Milos, M. C., Barna, F. M., & Botoc, C. (2020). Multifractal detrended fluctuation analysis (MF-DFA) of stock market indexes. Empirical evidence from seven Central and Eastern European markets. Sustainability, 12(2). doi: 10.3390/su12020535.
• Moagar-Poladian, S., Clichici, D., & Stanciu, C. V. (2019). The comovement of exchange rates and stock markets in Central and Eastern Europe. Sustainability, 11(14). doi: 10.3390/su11143985.
• Nsoesie, E., Okanyene, B.R., Yiyao L., Barnoon, L., & Brownstein, J. (2020). Analysis of hospital traffic and search engine data in Wuhan China indicates early disease activity in the Fall of 2019. Collections: HMS Scholarly Articles. Harvard Medical School.
• Özer, M., Kam?şl?, M., & Kam?şl?, S. (2016). The analysis of volatility spillovers between the German and Central and Eastern European (CEE) stock markets by using frequency domain causality test. In Europe and Asia: economic integration prospects. CEMAFI International Association, 165-179.
• Perron, P., & Phillips, P. C. B. (1988). Testing for a unit root in a time series regression. Biometrika, 2(75), 335-346. doi: 10.1080/07350015.1992.10509923.
• Pesaran, H. H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economics Letters, 58(1), 17-29. doi: 10.1016/S0165-1765(97)00214-0.
• Pietrzak, M. B., Fałdziński, M., Balcerzak, A. P., Meluzín, T., & Zinecker, M. (2017). Short-term shocks and long-term relationships of interdependencies among Central European capital markets. Economics and Sociology, 10(1), 61-77. doi: 10.14254/2071-789X.2017/10-1/5.
• Rapaccini, M., Saccani, N., Kowalkowski, C., Paiola, M., & Adrodegari, F. (2020). Navigating disruptive crises through service-led growth: the impact of COVID-19 on Italian manufacturing firms. Industrial Marketing Management, 88, 225-237. doi: 10.1016/j.indmarman.2020.05.017.
• Saadat, S., Rawtani, D., & Hussain, C. M. (2020). Environmental perspective of COVID-19. Science of the Total Environment, 728. doi: 10.1016/j.scitotenv. 2020.138870.
• Seo, J. (2020). Randomization tests for equality in dependence structure. Journal of Business & Economic Statistics, Advance online publication. doi: 10.1080/ 07350015.2020.1753527.
• Sheth, J. (2020). Impact of Covid-19 on consumer behavior: Will the old habits return or die? Journal of Business Research, 117, 280-283. doi: 10.1016/j. jbusres.2020.05.059.
• Šuleř, P., & Machová, V. (2020). Financial stability in Central European coun-tries: case of the Visegrad four. In F. Uslu (Ed.). Proceedings of the 7th in-ternational conference on education and social sciences (INTCESS 2020). Istanbul: International Organization Center of Academic Research, 1218-1223.
• Stoica, O., Diaconasu, D.-E., & Socoliuc, O. R. (2015). Dilemma: regional or international interdependencies in Central and Eastern European stock markets. Procedia Economics and Finance, 20, 601-609. doi: 10.1016/s2212-5671(15) 00114-8
• Syllignakis, M., & Kouretas, G. P. (2006). Long and short-run linkages in CEE stock markets: implications for portfolio diversification and stock market integration. SSRN Electronic Journal. doi: 10.2139/ssrn.910507
• Tong, C., Chen, J., & Buckle, M. J. (2018). A network visualization approach and global stock market integration. International Journal of Finance and Economics, 23(3), 296-314. doi: 10.1002/ijfe.1617
• Tsay, R. S. (2010). Analysis of financial time series. Hoboken, New Jersey: John Willey & Sons.
• Vochozka, M., Horák, J., & Krulický, T. (2020). Innovations in management forecast: time development of stock prices with neural net-works. Marketing and Management of Innovations, 2, 324-339.
• Voronkova, S. (2004). Equity market integration in Central European emerging markets: a cointegration analysis with shifting regimes. International Review of Financial Analysis, 13(5), 633-647. doi: 10.1016/j.irfa.2004.02.017.
• Vrbka, J., & Rowland, Z. (2017). Stock price development forecasting using neural networks. In J. Váchal, M. Vochozka, J. Horák (Eds.). SHS web of conferences - innovative economic symposium 2017: strategic partnership in international trade. Les Ulis: EDP Sciences. doi: 10.1051/shsconf/20173901032.
• Vrbka, J., Rowland, Z., & Šuleř, P. (2019). Comparison of neural networks and regression time series in estimating the development of the EU and the PRC trade balance. In J. Horák (Ed.). SHS web of conferences: innovative economic symposium 2018 - milestones and trends of world economy (IES2018). Les Ulis: EDP Sciences. doi: 10.1051/shsconf/20196101031.
• Williams, C. C. (2020). Impacts of the coronavirus pandemic on Europe's tourism industry: addressing tourism enterprises and workers in the undeclared economy. International Journal of Tourism Research. Advance online publication. doi: 10.1002/jtr.2395.
• Zeren, F., & Hizarci, A. (2020). The impact of COVID-19 coronavirus on stock markets: evidence from selected countries. Journal of Accounting and Finance Reviews, 3(1), 78-84. doi: 10.32951/mufider.706159.
• Zinecker, M., Balcerzak, A. P., Fałdziński, M., Meluzín, T., & Pietrzak, M. B. (2016). Application of DCC-GARCH model for analysis of interrelations among capital markets of Poland, Czech Republic and Germany. In M. Reiff & P. Gezik (Ed.). Proceedings of the international scientific conference quantitative methods in economics multiple criteria decision making XVIII. Vratn: Letra Interactive, 416-421.

Identifiers

DOI

10.24136/eq.2020.027

Biblioteka Nauki

22444400