Interrelationship between DAX index and four largest eastern european stock markets

Abstract

© 2018, Institute for Economic Forecasting. All rights reserved. This paper examines the interrelationship between German stock index and four indices of Emerging European markets (EEM). For the research purposes, we utilize asymmetric BEKK-GARCH models with and without structural breaks insertion. The dynamic correlations show that high level of integration exists between German stock market and selected EEMs, which undermines diversification opportunities. The shocks from the Czech market have unidirectional shock spillover impact on German stock market, while Polish and Romanian indices suffer shock impact that occur in the German stock market but it does not happen vice-versa. Spillover results can be used to forecast future dynamics of receiving variable. Utilizing dummy variables in the A-BEKK-GARCH framework, this paper raises awareness that proper model assessment is necessary, in order to get more reliable estimates that can be used in decision-making process.