Return and volatility spillovers in twelve Eastern European countries, 2006-2015

Abstract

This study investigates return and volatility spillovers in the stock markets of 12 Eastern European countries using an augmented univariate AR-EGARCH model. The study introduces two additional explanatory variables: the change in exchange rates of each country’s domestic currency to the USD and the return of the S&P 500 index. The previous period's figures were preferred for both parameters. These newly introduced variables are used not only separately, but also in conjunction with and without the liquidity factor. Thus, a ‚bouquet’ of eight parallel equations for each sample is formed. According to the empirical results, return and volatility spillovers are confirmed for most cases, regardless of the chosen approach. Furthermore, the expected positive sign for the coefficients regarding the exchange rates and the S&P 500 index is verified most of the time. Moreover, the leverage effect was observed in several cases. In addition, the outcomes illustrate that the trading volume’s coefficient mainly carries a positive sign and that this variable accounts for spillover effects in return and volatility. Overall, it can be concluded that the developed univariate AR-EGARCH models successfully capture the effects of volatility transmissions in the examined stock markets.