Silvo Dajcman

European stock market comovement dynamics during some major financial market turmoils in the period 1997 to 2010 -- a comparative DCC-GARCH and wavelet correlation analysis

This article examines the comovement dynamics between the developed European stock markets of the United Kingdom, Germany, France and Austria. After applying a Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedastic (DCC-GARCH) and wavelet multiscale analysis on a daily return series for the period 1997 to 2010, we found that (1) comovements between stock market returns are time varying and scale dependent; (2) financial crisis in the observed period did not uniformly increase comovement between stock market returns across all scales; (3) the global financial crisis of 2007–2008 only slightly and temporarily increased the already high level of comovement between the observed stock markets.

Time-varying long-range dependence in stock market returns and financial market disruptions -- a case of eight European countries

The long-range dependence (or long memory) in stock market returns has many implications for modern financial economics. The existent empirical studies on long-range dependence in stock market returns, however, do not examine it on a dynamical basis. In this article we applied a rolling window approach to prove that long-range dependence parameter for eight European stock market returns is time-varying. Our findings show that sharp, but temporary, increases of long-range dependence parameter for investigated stock market returns in the period October 1999 to April 2011 coincided with the major financial market disruptions in the world and Europe.

Comovement between stock and bond markets and the ‘flight-to-quality’ during financial market turmoil – a case of the Eurozone countries most affected by the sovereign debt crisis of 2010–2011

This article examines the comovement between stock market returns and the dynamics (i.e. changes) of sovereign bond yields for the Eurozone countries affected by the sovereign debt crisis and for Germany, whose sovereign bonds are normally regarded as ‘safe havens’ in the financial markets. To investigate whether the periods of the greatest financial market turmoil in the last decade coincided with a Flight-To-Quality (FTQ; the flight from the riskier stocks to safer sovereign bonds), a simple FTQ indicator is defined and calculated. We find that the comovement between stock market returns and the dynamics of sovereign bond yields is time varying. For Germany, the correlation between stock market returns and the dynamics of sovereign bond yields is mostly positive during the observed period, whereas for the countries affected by the sovereign debt crisis, the correlation is mostly negative, especially after the start of the sovereign debt crisis in the Eurozone. Financial crises normally coincide with higher correlations, whereas Greeces sovereign debt crisis in the Eurozone led to a reduced correlation in Ireland, Italy, Portugal and Spain. The financial market crises prior to 2010 led to an increased FTQ in all investigated countries, whereas after the start of the sovereign debt crisis in the Eurozone, the FTQ is only observed in Germany.

Was there a contagion between major European and Croatian stock markets? An analysis of co-exceedances

This article examines extreme returns co-movement and contagion between the Croatian and 10 European stock markets during major financial market distress periods in the period from end of 2003 until start of 2012. The extreme return co-movement analysis is based on analysis of coincidences of extreme return shocks (co-exceedances; extreme returns are defined as lower 5% daily returns in the empirical return distributions) across investigated countries. I found that the first instances of co-exceedances between the Croatian and the observed European stock markets occurred in the 2007, during the subprime mortgage crisis as the predecessor of the global financial crisis. With the start of the global financial crisis, the count of co-exceedances across all observed pairs of stock markets markedly increased. In order to separate contagion from interdependence, I further applied a multinomial logistic function, that enabled me to control for common world and regional factors that affected all investigated stock markets simultaneously. In controlling for these factors I found that the increase in the count of negative return co-exceedances between the Croatian and major European stock markets during the global financial crisis and the eurozone debt crisis cannot be attributed to contagion.

Multiscale test of CAPM for three Central and Eastern European stock markets

This paper examines the systematic risk and validity of the basic capital asset pricing model of Sharpe (1964), Lintner (1965) and Mossin (1966) in three Central and Eastern European stock markets (i.e. Slovenia, Hungary and Czech Republic). The CAPM is tested on a multiscale basis, building on the Fama and MacBeth (1973) methodology and applying two modern econometric techniques -- wavelet analysis and generalized method of moments estimation. Empirical results indicate that the systematic risk and validity of CAPM implications are multiscale phenomena. Empirical evidence in support of CAPM implications in the investigated Central and Eastern European stock markets is found to be weak. The most commonly violated CAPM hypotheses are the zero Jensens alpha condition, positive market premium, and the non-systematic influence of non-observable variables on the excess returns of stocks in these stock markets.

Are Stock Market Returns in the CEE Countries and in the Eurozone, Russia, and the United States Asymmetric?

This paper investigates the (a)symmetry between stock market returns in Central and Eastern European (CEE) countries (Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, and Poland) on the one hand, and in the eurozone, Russia, and the United States on the other. Correlation asymmetry is investigated by applying a dynamic version of the test developed by Hong et al. (2007). The results show that the correlation when returns fall simultaneously in two stock markets (lower-tail correlation) normally exceeds the correlation when returns increase simultaneously (upper-tail correlation). The CEE stock markets that are the most correlated (as measured by Pearsons correlation) with the stock markets of the eurozone, Russia, and the United States exhibit a higher degree of symmetry between upper- and lower-tail correlation than do CEE markets that are less strongly correlated with these other markets. The dynamic version of Hong et al.s test revealed that there were more periods of asymmetric correlation for the stock markets of the Baltic region than for other stock markets in CEE countries.

Tail dependence between Central and Eastern European and major European stock markets: a copula approach

This article analyses dynamic tail dependence between the returns of the three largest Central and Eastern European (CEE) stock markets (Hungary, Czech Republic and Poland) and two major Eurozone stock markets (Germany and France). Tail dependence is modelled by a constant and dynamic ‘symmetrized Joe-Clayton’ (SJC) copula assuming GARCH stock market return processes. The results of the dynamic SJC copula model show that the dependence between pair-wise observed stock markets is time-varying and asymmetric with lower tail dependence mostly exceeding upper tail dependence. The results of the article imply that advantages of international portfolio diversification are reduced in downturns.