Stock Market Contagion from Western Europe to Central and Eastern Europe During the Crisis Years 2008-2012

This paper investigates possible contagion from West European stock markets to stock markets in Central and Eastern Europe. The dynamic conditional correlation (DCC) bivariate generalized autoregressive conditional heteroskedasticity (GARCH) models are used to estimate the degree of the correlations between the stock market benchmark for the eurozone and Central and Eastern Europe. The results of this paper indicate that the DCCs increased steadily between 2002 and 2012, which could be attributed to closer financial integration. During the crisis the dynamic correlations rose substantially, which suggests some contagion. Furthermore, several episodes of the sovereign debt crisis coincide with peaks in the DCCs.