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CEE Banking Sector Co-Movement: Contagion or Interdependence?

Terhi Jokipii and Brian Lucey IIIS Discussion Paper No.77

Abstract

This paper examines banking and financial sector return co-movements between the three largest Central and Eastern European countries to have recently joined the European Union, namely the Czech Republic, Hungary and Poland. In order to build up an understanding of the soundness and stability of the banking systems of these new member states, we try to determine whether it is contagion, or interdependence that is driving the co-movements between these markets. Employing various different tests of propagation and controlling for own-country news and other fundamentals, we find evidence of cross-border banking sector contagion and determine that it is regional rather than international shocks that are driving the market movements.

JEL classification: F30, F40, G15

Key words: Contagion, Macroeconomic news, Banking sector, Stock returns


Last updated 28 August 2014 by IIIS (Email).