Contagion among Central and Eastern European stock markets during the financial crisis

TL;DR

This paper uses wavelet analysis on high-frequency data to explore how Central and Eastern European stock markets are interconnected and how contagion varies across different time horizons, especially during the 2008 crisis.

Contribution

It introduces wavelet tools to analyze high-frequency financial data, revealing dynamic correlations and contagion patterns across time and frequency domains.

Findings

Lower contagion between CEE markets and DAX at higher frequencies.

Reduced contagion after the 2008 financial crisis.

Wavelet analysis uncovers time-frequency dynamics of market relationships.

Abstract

This paper contributes to the literature on international stock market comovements and contagion. The novelty of our approach lies in application of wavelet tools to high-frequency financial market data, which allows us to understand the relationship between stock markets in a time-frequency domain. While major part of economic time series analysis is done in time or frequency domain separately, wavelet analysis combines these two fundamental approaches. Wavelet techniques uncover interesting dynamics of correlations between the Central and Eastern European (CEE) stock markets and the German DAX at various investment horizons. The results indicate that connection of the CEE markets to the leading market of the region is significantly lower at higher frequencies in comparison to the lower frequencies. Contrary to previous literature, we document significantly lower contagion between the CEE markets and the German DAX after the large 2008 stock market crash.