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Risk connectedness of selected CESEE stock markets: a spillover index approach

Risk connectedness of selected CESEE stock markets: a spillover index approach The purpose of this paper is to empirically evaluate risk spillovers between selected CESEE (Central, Eastern and South-Eastern Europe) stock markets in order to evaluate the possibilities of an international diversification of a portfolio.Design/methodology/approachThe VAR model and the Diebold and Yilmaz (2009, 2012) spillover index are used, with rolling indices estimation over time in order to observe dynamics, which is important for investment strategies. Data are monthly and include selected CESEE stock market indices which were available to the researcher.FindingsThe empirical analysis for the period of January 2012–June 2019 indicates that some country risks were the net emitter of shocks in the system (Slovenia and Czech Republic), whereas some were net receivers (Croatia and Ukraine). The results are robust with respect to changing the length of the rolling window analysis, which means that investors could utilize such an approach in a dynamic portfolio selection.Research limitations/implicationsObserving only selected markets due to data (un)availability.Practical implicationsThe paper shows how international investors can utilize the aforementioned methodology in order to make a more detailed analysis of the dynamics of stock markets connectedness so that international portfolios can be rebalanced according to the results and investors’ preferences.Originality/valueThis is the first such research which focuses on CESEE countries, since existing research is focused on more developed stock markets. Moreover, the empirical analysis extends to commenting the pairwise net indices over time, which is important for the dynamic portfolio rebalancing over time. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Risk connectedness of selected CESEE stock markets: a spillover index approach

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2044-1398
DOI
10.1108/cfri-07-2019-0124
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to empirically evaluate risk spillovers between selected CESEE (Central, Eastern and South-Eastern Europe) stock markets in order to evaluate the possibilities of an international diversification of a portfolio.Design/methodology/approachThe VAR model and the Diebold and Yilmaz (2009, 2012) spillover index are used, with rolling indices estimation over time in order to observe dynamics, which is important for investment strategies. Data are monthly and include selected CESEE stock market indices which were available to the researcher.FindingsThe empirical analysis for the period of January 2012–June 2019 indicates that some country risks were the net emitter of shocks in the system (Slovenia and Czech Republic), whereas some were net receivers (Croatia and Ukraine). The results are robust with respect to changing the length of the rolling window analysis, which means that investors could utilize such an approach in a dynamic portfolio selection.Research limitations/implicationsObserving only selected markets due to data (un)availability.Practical implicationsThe paper shows how international investors can utilize the aforementioned methodology in order to make a more detailed analysis of the dynamics of stock markets connectedness so that international portfolios can be rebalanced according to the results and investors’ preferences.Originality/valueThis is the first such research which focuses on CESEE countries, since existing research is focused on more developed stock markets. Moreover, the empirical analysis extends to commenting the pairwise net indices over time, which is important for the dynamic portfolio rebalancing over time.

Journal

China Finance Review InternationalEmerald Publishing

Published: Sep 22, 2020

Keywords: Portfolio diversification; Developing stock markets; Risk spillovers; Shock spillovers

References