The Dynamic Directional Connectedness of Equity

and Currencies of Eastern European Economies

(EURO Denominated Currencies)
Ankita Sharma, 1502032
Ravi Gupta, 1502149

1. Introduction
At the point when the Soviet Union broken down in 1991, all the Soviet Republics
circumscribing Eastern Europe pronounced autonomy from Russia and joined
with the rest of Europe. The transition Eastern Europe has encountered in the
most recent couple of decades has not been simple; in any case, the greater part
of the nations are currently seeking Western Europe for exchange and financial
advancement. Cooperation continues between Eastern and Western Europe, and
the European Union (EU) has developed as the essential financial and political
substance of Europe.
The crumple of Communism and the Soviet Union prompted to upheaval and
transition in the region of Eastern Europe in the 1990s. Every nation in the area
was under Communist rule. The nations flanking Russia were once some portion
of the Soviet Union, and those countries not part of the Soviet Union were
vigorously affected by its overwhelming position in the locale. When the Soviet
Union collapsed in 1991, the circumscribing nations proclaimed freedom and
started the procedure of reconciliation into the European community. The power
of the state was transferred from the Communist elite to the private citizen.
People could vote for their public officials and could choose businesses and work
individually. With the EU looming over the realm, the now-independent countries
of Eastern Europe shifted their economic direction away from Moscow and the
collapsing Communist state and toward the core industrial countries of Western
Europe and the EU.
Developing Eastern European securities exchanges have come to intrigue global
money related scientists and strategy creators amid the most recent decade.
These business sectors have pulled in the consideration of global speculators
because of their better enhancement openings. They have turned out to be more
appealing and open for venture because of diminishing confinements on
exchanges, a progression of changes, and expanding money related
straightforwardness. Besides, European Union amplification makes a one of a
kind scene for new financial examinations and investigation.
As Eastern European nations have encountered noteworthy changes in their
settings of conversion standard plans, and in money related arrangement,
Fromer(2006) being the primary normal for post-socialist nations to begin the
procedure of move by settling on adjustment technique in term of settling the
exchange rate. Accordingly, this settled conversion standard administration turns
out to be more adaptable (Sachs, 1996), and subsequent to enlarging the groups
what is interpreted in an expansion in the adaptability that will prompts to an
increment in exchange rate volatality. Considering these qualities we chose to
break down the connection between stock returns and exchange rate for the
timeframe before the nations joined the European Union (EU), that is before the
first of May of 2004, and after the timeframe that the joined EU. Also, as
exchange rate volatility have a direct influence on the labour market, in order to
increase or decrease the level of unemployment, that have a direct impact in the
growth rate of an economy and as a result will influence the foreign direct
investment in a country which is reflected in the stock returns, this issue become
of great interest for academics and practitioners.
The objective of this article is to provide an empirical analysis of the linkage
between the volatility of stock prices and the volatility of the exchange rate for
Eastern European countries and Russia. As empirical evidence on volatility
spillovers between stock markets and exchange rates have tended to focus on
the G-7 countries, Yang and Doong (2004); Kanas (2000,2002). There is no
evidence till date that this relationship have been analysed for the Eastern
European countries. Therefore, our aim is to fill the gap in the literature in this
area by investigating this issue, using data for the period of 2000 to 2016 for
Eastern European countries, transition economies and Russia.
As to experimental viewpoint, earlier research analyzes the relationship between
the two factors in the money related markets. From one perspective, Aggarwal
(1981), Chiang et al. (2000), Wu (2000), Fang (2002), Wongbangpo and Sharma
(2002), and Phylaktis and Ravazzolo (2005) locate the significant proof
supporting the floworiented speculation of trade rates. Onthe other hand, the
observational works by Soenen and Hennigar (1988), Kwona and Shinb (1999),
Maysami and Koh (2000), Ibrahim and Aziz (2003), Kim (2003), Tai (2007), Tsai
(2012), and Liang, Lin, and Hsu (2013) affirm the stock situated theory of trade
rates. Nevertheless, some different reviews concentrate on this issue on a for
every nation premise, in spite of the fact that the possible outcomes are
questionable. For example, late works, for example, Bahmani-Oskooee and
Sohrabian (1992), Yu (1997), Abdalla and Murinde (1997), Ajayi et al. (1998),
Granger, Huang, and Yang (2000), Nieh and Lee (2001), Yau and Nieh (2006),
Yutaka (2006), and Pan, Fok, and Liu (2007) on reviewing the relationship
between the two factors utilizing the Granger-causality in Asian developing
economies have not yet achieved accord. All the more vitally, in concentrate
diverse issues, Kao and Chiang (2000) and Lee, Lee, and Chiu (2012)
demonstrate that past reviews utilizing the conventional techniques overlook the
nation heterogeneity issue, which produces homogeneous predisposition and the
potential endogeneity issue, accordingly rendering the evaluated coefficients
wasteful. The utilization of Pedroni's (1999, 2004) heterogeneous board co-
reconciliation strategies in this review can successfully tackle the two
econometric issues.
This paper looks at the securities exchanges in Russia, the Czech Republic,
Poland, Hungary, Romania, Moldova, Croatia, Lithuania, Latvia, Estonia, Slovenia,
Slovakia, Bulgaria, Ukraine, Belarus, Serbia, Montenegro, Bosnia and
Herzegovina, Albania, Kosovo and Macedonia securities exchanges, in a setting
of provincial impacts. Our observational examinations endeavor to research
whether and to what degree these developing markets are incorporated with
each other. The motivation behind this review is triple. To start with, we take a
gander at the linkages between Eastern European developing value markets and
Russia. Second, we explore the connections between the money markets of
Eastern European economies and Russia. At long last, we look at the relationship
between Emerging Eastern European and Russian value and cash markets.
This paper researches the connections between Eastern European and Russian
stock and cash markets utilizing the GARCH procedure, for which a BEKK
portrayal created by Engle and Kroner (1995) is received. We research the
connections between securities exchanges, between outside trade markets, and
amongst stock and cash showcases inside one nation. Our examination looks at
whether changes on one market (for example, a securities exchange) impact the
execution of another market (for instance, a cash market).The test period is from
2000 to 2016, covering Eastern Europe economies and Russia. Every one of
these nations experienced changes in their economies in transit from socialist to
entrepreneur direction frameworks. Poland, Hungary, and the Czech Republic as
of late joined the European Union. These nations have the greatest securities
exchanges in Emerging Eastern Europe as far as market capitalization. Then
again, Russia is one of the biggest developing markets on the planet today. All
the specimen nations are developing quick given the extensive variety of
chances for nearby and outside financial specialists.
We discover proof of direct linkages between the value markets of Eastern
European nations and Russia as far as both returns and unpredictability.
Additionally, relationship between the Eastern European money markets was
found. While examining the relationship amongst money and securities
exchanges we find unidirectional unpredictability overflows from cash to stock
exchanges in some Eastern Europe nations and Russia. In any case, the Czech
Republic returns are additionally found to influence the money showcase. In
general, our outcomes indicate clear proof of coordination of Eastern European
markets inside the locale and with Russia too.
The association between various value markets has been extensively inspected.
Most reviews, be that as it may, have centered their consideration around
instability overflows inside the created money related markets (see, for instance,
Hamao et al., 1990; Theodossiou and Lee, 1993; Lin et al., 1994; Susmel and
Engle, 1994; Karolyi, 1995).
There are various reviews investigating the connections between the developing
markets of various locales, despite the fact that such work is still rare. For
instance, Worthington et al. (2000) take a gander at the value linkages in Asian
value markets. Kasch-Haroutounian and Price (2001) look at Central Europe. Sola
et al. (2002) break down instability connects between the securities exchanges
of Thailand, South Korea, and Brazil. All the more as of late, Li (2007)
concentrated the global linkages of Chinese stock trades. The examination of
Eastern European and Russian market linkages, then again, is restricted and
needs more examination. Few reviews investigate these business sectors as far
as unpredictability and return linkages. Uncommon cases incorporate Li and
Majerowska (2008), Fedorova and Vaihekoski (2009), and Scheicher (2001), who
concentrate the linkages between the Czech Republic, Poland, and Hungary,
though Saleem (2009) examines the global linkages of the Russian market.
Similarly, the writing on the linkages amongst value and money advertises
generally clarifies the elements of the cash and value markets of created
economies (see, for instance, Yang and Doong, 2004; Francis et al., 2006; Dark et
al., 2005). There are a few reviews managing the developing economies,
however these are still uncertain (see, for instance, Morales, 2008; Tai, 2007;
 Yang and Chang, 2008). Specifically, considers covering the developing markets
in Eastern Europe and Russia are rare.

2. Literature Review
In late decades, a few scholarly reviews on budgetary resource costs primarily
focus on the relationship between trade rates and stock costs. As to hypothetical
perspective, two models can represent this relationship. Dornbusch and Fischer
(1980) build up the stream situated theory of trade rates concentrating on the
present record of the adjust of installments, which conjectures that adjustments
in return rates impact genuine yield and stock costs decidedly by means of
worldwide intensity and exchange adjust. Conversely, Branson (1983) and
Frankel (1983) display the stock arranged theory of trade rates focusing on the
capital record, which recommends that trade rates influence stock costs
adversely by means of capital portability.
It has been observed that any financial crisis is capable of causing substantial
damages and loss in economy not only locally but to other countries. The other
countries affected are because of trade relationships, varied policy of currency,
contracts of financial functions and investments in other countries. Few
examples of crisis witnessing the above scenarios are Asian financial crisis which
happened in 1997, Russian bond crisis in 1998, dot-com bubble in 2001, very
known global financial crisis in 20072008, and finally EU sovereign debt crisis in
2010, the spilling effects of which was seen in various parts of the world. Small
financials risks which effect only a small area or sector spread like a disease
which spread across places affecting different economies or geographic having
healthy economies in place. Through correlation of various financial time series
data, many researchers, have tested the connectedness among different
countries. Moreover, a lot of studies have established relationships between
stock and foreign exchange markets, provided the noteworthy increase in global
capital flows in the last 20 years. Few other studies have focused on global stock
market return predictability giving rise to varied findings across different regions
and time periods. Dramatic advances have been seen in the field of complex
networks in various research fields. Examples of networks which can be modelled
using coupled systems are the www. i.e., world-wide-web, known as the Internet,
highway systems, and electric power grids. Here, the connectivity among
different network components are essential. In the same way, any economic
system is composed of lots of agents, connecting at different levels. The
operators in the framework could be singular dealers, firms, banks, monetary
markets, or nations, subsequently the worldwide budgetary framework can be
very much spoken to by utilizing a perplexing system demonstrate. As of late,
specialists have utilized system hypothesis to concentrate monetary frameworks
and in addition systemic hazard proliferation through the budgetary system. We
create and investigate a two-layer reliant system, where each layer speaks to an
alternate monetary market and cooperations exist inside a similar market, as
well as between the two layers. On account of these associations,
disappointment in a specific system hub can trigger worldwide systemic hazard
and emergency engendering to different hubs in the system. In this review, we
select major worldwide securities exchange records and their comparing
monetary forms as the two layers in our coupled system show. Securities
exchanges are a typical exchange put for organization shares in this manner
mirroring organizations' exhibitions and financial specialists' impression of
organization qualities. Additionally, securities exchanges are viewed as driving
monetary markers and thusly valuable as indicators of the economy. The remote
trade market is the biggest budgetary market on the planet, with market
members effectively included in money exchanging 24 h a day aside from ends
of the week, with day by day turnover of more than 5 trillion US dollars, as
indicated by the Bank for International Settlement. These two money related
markets catch imperative parts of a nation's financial status, and thusly, we
utilize them as a centrepiece of our examination. We utilize a perplexing system
way to deal with model the collaboration amongst stock and remote trade
markets to catch the topology and in addition the elements in this coupled
money related framework. We think about 56 securities exchange lists and 45
particular monetary forms since 12 of the nations in our dataset utilize the euro
as their official cash. Our investigation uncovers novel bits of knowledge and
fascinating elements of the cooperation among worldwide stock and cash
markets. We separate the whole time of 2002 to 2012 into two time interims,
non-emergency (20022006) and emergency (20072012) periods. We find that
relationships display diverse conduct amid the emergency time frame, for
example, higher securities exchange connections and lower remote trade
relationships when contrasted with the non-emergency period. The goal of this
article is to study group developments in worldwide money related markets and
to examine the systemic significance of nations and their impact on different
nations or locales.
The money related transmission component in CEE nations and the business-
cycle connection between the CEE economies and the Euro range have been
contemplated widely (see Fidrmuc and Korhonen, 2006; Egert " et al., 2007;
Egert and MacDonald, 2009, for studies in regards to the business-cycle
correlation, the financing cost go through, and the fiscal transmission instrument
in CEE, separately). Be that as it may, just a couple papers consider the dynamic
impacts of outside stuns on CEE economies. Jim'enez-Rodriguez et al. (2010)
asses the preconditions for the well-working of a broadened fiscal union. In
examining this issue, the Euro territory and the United States are considered as
the remote economy in a close VAR display. The examination demonstrates that
a stun in the outside loan cost prompts to a fall in mechanical generation in each
of the ten CEE nations and to a fall in costs in the majority of them. Besides, an
expansion in remote mechanical creation triggers an expansion in household
modern generation and a genuine valuation for local monetary forms. The CEE
nations demonstrate a high level of homogeneity, showing a decent pre-
condition for joining the money related union. Benkovskis et al. (2011)
investigate the transmission of fiscal arrangement stuns from the Euro range to
Poland, Hungary, and the Czech Republic. They utilize a component enlarged VAR
(FAVAR) model and demonstrate that there are significant impacts of Euro
territory money related arrangement on monetary action in the considered CEE
nations, which for the most part work through the loan cost divert and through
changes in remote request. Moreover, the swapping scale is appeared to be vital
in clarifying developments in CEE costs. Crespo-Cuaresma et al. (2011)
investigate the transmission of monetary stuns from Germany to the CEE-5
nations. They utilize a basic VAR model and demonstrate that a monetary
development in Germany triggers expansionary financial strategy measures in
each of the five CEE nations. Most as of late, Back'e et al. (2013) and Feldkircher
(2013) have contributed considerably toward the comprehension of the overflow
impacts of yield and loan fee stuns to the CEE nations by utilizing a worldwide
VAR (GVAR) demonstrate. They discover confirm for positive yield overflow
impacts and negative loan cost impacts from Western Europe to the CEE nations.
This short review shows that the current exact work is either in light of time-
arrangement applications without hypothetical establishments or generally stuns
are distinguished through hypothetical short-run limitations. Garratt et al. (2006)
contend that this system has the burden that there is very little agreement
among financial analysts on short-run monetary hypothesis suggesting that
recognizing confinements in view of these speculations are unbelievable. Rather,
they backer to utilize long-run financial hypothesis for recognizing confinements
to be forced on the co-integration space of a SVECM. There are two late
commitments based upon the bits of knowledge of Garratt et al. (2006) which
break down the impacts of stuns between two monetary regions: Gaggl et al.
(2009) examine the Euro region and the United States and utilize a dynamic
open economy model to determine five relations that might be utilized for
recognizable proof of the long-run connections of the blunder amendment part.
The limited VEC model is evaluated for every economy independently and
summed up motivation reaction examination is completed to uncover the
impacts of stuns in one financial region on the other and furthermore to research
contrasts in conformity procedures to deviations from long-run equilibria
between the Euro territory and the United States. In an appraisal of the
transmission of stuns amongst Austria and Germany, Prettner 4 and Kunst (2012)
adjust the system of Garratt et al. (2006) to represent the high level of work
market combination of these two nations. Their investigation demonstrates that
financial stuns in Germany have noteworthy and sizable effects on the Austrian
economy, while comparing stuns to Austrian factors influence the German
economy to a much lesser amplify. To the best of our insight, there exists no
paper that applies a comparable demonstrating technique like Garratt et al.
(2006) to the CEE locale. We intend to fill this crevice and in this way supplement
the work of Back'e et al. (2013) and Feldkircher (2013) to improve our insight on
the transmission of stuns between the Euro territory and the CEE nations. The
Great Crisis of 2007-2011 struck the worldwide money related framework more
compellingly than whatever other in late history, beginning in the U.S. sub-prime
home loan showcase and advancing through a few phases enduring eighteen
months. At that point it went worldwide in late 2008, influencing numerous
nations and markets, delivering a worldwide subsidence and a sharp worldwide
exchange constriction in 2009. Fringe EU nations were hit especially hard in
2010-2011, with numerous money related establishments, as well as a few
governments, moving toward liquidation. This foundation clarifies that
understanding money related organization connectedness is key for
comprehension budgetary emergencies and their development.
In this paper we add to such a comprehension with a point by point investigation
of connectedness both inside and between U.S. what's more, European monetary
foundations, 2004-2014, a period that incorporates all periods of the Great Crisis.
Our investigation and results go from the granular (pairwise connectedness of
individual organizations) to the aggregative (aggregate framework wide
connectedness), and from static (genuine, or "normal," connectedness over the
full specimen) to dynamic (restrictive connectedness and its developments amid
specific scenes). Our commitment is audaciously experimental as opposed to
methodological, as we have built up the fundamental methodological
econometric system in a progression of prior papers (Diebold and Yilmaz (2009),
Diebold and Yilmaz (2012), Diebold and Yilmaz (2014)) as brought together in
Diebold and Yilmaz (2015). The new commitment, then, is the substantive
investigation, in view of another dataset that incorporates budgetary foundations
on both sides of the Atlantic. The outcomes supplement and essentially broaden
Diebold and Yilmaz (2014), who concentrated just U.S. budgetary organizations
thus could say nothing in regards to trans-Atlantic linkages, in spite of their
significance as the emergency advanced comprehensively. In addition to other
things, we archive and measure clear moves toward net connectedness as the
emergency unfurled. From the get-go, as dread grasped the U.S. advertises in
2007-2008, the heading was unmistakably from the U.S. to Europe. (That is, it
might be said that we will in no time make exact, the U.S. was an unmistakable
net exporter of future instability to Europe.) Then, beginning in late 2008 as
Lehman Brothers fizzled and Europe got to be distinctly involved in the
emergency, connectedness turned out to be a great deal more similarly bi-
directional. At last, later in 2011 as the wellbeing of EU monetary foundations
crumbled, the adjust tipped the other way; we report an exceptional surge in net
directional connectedness from European to U.S. money related foundations.