This paper investigates causal relationships and short-term interaction
mechanisms among six Central and Eastern European stock markets and the USA
stock exchange, while paying special consideration to the effects of the
2007-2009 global financial crisis. We employ daily observations for the six
CEE stock indexes and also for the US market covering the period January
2006-March 2009, which is subsequently divided into two sub-periods
corresponding to the pre-crisis and crisis period. The study reveals that the
relationships among CEE stock markets are time varying. While before the
crisis stock market linkages are limited, we find that during crisis these
interactions become significantly stronger. Our results further suggest that
the potential for diversifying risk by investing in different CEE markets is
limited during financial turmoil. Other findings reveal the leading role of
the Russian market in the CEE region before the crisis. Also, before the
crisis CEE markets were significantly influenced by innovations in the USA
market, thus explaining why they were affected heavily by the crisis, which
has managed to spread immediately in the region.
Linkages Between the US and European Stock Markets: A Fractional Cointegration Approach