The Dynamic Directional Connectedness of Equity

and Currencies of Eastern European Economies

(EURO Denominated Currencies)
Ankita Sharma, 1502032
Ravi Gupta, 1502149
Abstract
This study investigates the directional dynamic relationships between equity
markets and currency markets for the Eastern European countries and Russia
over the period January 2005December 2016. Over the past 20 years, many
Eastern European countries have integrated themselves with the European Union
with a high degree of globalization in economic and financial relations. The
purpose of this study has three steps. First, we look at the linkages between 20
Eastern European emerging equity markets and Russia. Second, we investigate
the relationships between the currency markets of 11 Eastern European
countries and Russia. We have used Diabold and Yilmaz method to estimate
dynamic connectedness. Finally, we examine the interdependence between
Emerging Eastern European and Russian equity and currency markets. We find
evidence of direct linkages between the equity markets in terms of both returns
and volatility, as well as in the currency markets. While analysing the
relationships between currency and stock markets we found unidirectional
volatility spillovers from currency to stock markets. The results show clear
evidence of interdependence of Eastern European markets within the region and
with Russia as well.

1. Introduction Eastern Europe in the 1990s. Every

nation in the area was under
At the point when the Soviet Union Communist rule. The nations flanking
broken down in 1991, all the Soviet Russia were once some portion of the
Republics circumscribing Eastern Soviet Union, and those countries not
Europe pronounced autonomy from part of the Soviet Union were
Russia and joined with the rest of vigorously affected by its
Europe. The transition Eastern overwhelming position in the locale.
Europe has encountered in the most When the Soviet Union collapsed in
recent couple of decades has not 1991, the neighbouring nations
been simple; in any case, the greater proclaimed freedom and started the
part of the nations are currently procedure of reconciliation into the
seeking Western Europe for European community. The power of
exchange and financial the state was transferred from the
advancement. Cooperation continues Communist elite to the private
between Eastern and Western citizen. People could vote for their
Europe, and the European Union (EU) public officials and could choose
has developed as the essential businesses and work individually.
financial and political substance of With the EU looming over the realm,
Europe. the now-independent countries of
Eastern Europe shifted their
The crumple of Communism and the
economic direction away from
Soviet Union prompted to upheaval
Moscow and the collapsing
and transition in the region of
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, (Frommel, 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 t (Doong S., 2004) (Kanas, 2002)
(Aggarwal, 1981)he 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 first 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
endeavour 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
Albania, Czech Republic, Croatia,
Hungary, Macedonia, Poland,
Romania (new & old), Tunisia, Turkey
(new & old), Ukraine, Russia and
Euro. Many countries are not
considered in the currency list as
they are already using Euro as their
currency. The analysis of currency
market will give us insights about the
inter connectedness of Eastern
European countries and Russia. At
the same time it would give us
insights about these sample
countries connectedness with the
Euro. At long last, we look at the
relationship between Emerging
Eastern European and Russian stock
and cash markets.
This paper researches the
connections between Eastern
European and Russian stock and
cash markets utilizing Diabold and
Yilmaz method. 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 2005 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.
Following these developments, the
aim of this study is to investigate the
dynamic relationship between
exchange rates in currency markets
and stock prices in equity markets
for the Eastern European countries
and Russia
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.
The rest of the paper is structured in
the following order: The next section
summarizes the literature. Section 3
explains the methodology of
directional connectedness measures
proposed by Diebold and Yilmaz
(2015). Section 4 provides outline of
data description of the sample
countries chosen for currency and
equity markets, sample period of the
data and preliminary statistics of the
sample countries currency and stock
markets and their lognormal returns.
In Section 5, we perform a full
sample analysis of static
connectedness of sample countries
data mentioned in section 4. Also in
this section, we perform a rolling
sample analysis to check the
 directional dynamic connectedness
across sample period. The section 6
summarises the results of Section 5
and presents the conclusion on the
research paper.
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, the non-emergency period. The goal
we select major worldwide securities of this article is to study group
exchange records and their developments in worldwide money
comparing monetary forms as the related markets and to examine the
two layers in our coupled system systemic significance of nations and
show. Securities exchanges are a their impact on different nations or
typical exchange put for organization locales.
shares in this manner mirroring
The money related transmission
organizations' exhibitions and
component in CEE nations and the
financial specialists' impression of
business-cycle connection between
organization qualities. Additionally,
the CEE economies and the Euro
securities exchanges are viewed as
range have been contemplated
driving monetary markers and thusly
widely (see Fidrmuc and Korhonen,
valuable as indicators of the
2006; Egert " et al., 2007; Egert and
economy. The remote trade market is
MacDonald, 2009, for studies in
the biggest budgetary market on the
regards to the business-cycle
planet, with market members
correlation, the financing cost go
effectively included in money
through, and the fiscal transmission
exchanging 24 h a day aside from
instrument in CEE, separately). Be
ends of the week, with day by day
that as it may, just a couple papers
turnover of more than 5 trillion US
consider the dynamic impacts of
dollars, as indicated by the Bank for
outside stuns on CEE economies.
International Settlement. These two
Jim'enez-Rodriguez et al. (2010)
money related markets catch
asses the preconditions for the well-
imperative parts of a nation's
working of a broadened fiscal union.
financial status, and thusly, we utilize
In examining this issue, the Euro
them as a centrepiece of our
territory and the United States are
examination. We utilize a perplexing
considered as the remote economy
system way to deal with model the
in a close VAR display. The
collaboration amongst stock and
examination demonstrates that a
remote trade markets to catch the
stun in the outside loan cost prompts
topology and in addition the
to a fall in mechanical generation in
elements in this coupled money
each of the ten CEE nations and to a
related framework. We think about
fall in costs in the majority of them.
56 securities exchange lists and 45
Besides, an expansion in remote
particular monetary forms since 12
mechanical creation triggers an
of the nations in our dataset utilize
expansion in household modern
the euro as their official cash. Our
generation and a genuine valuation
investigation uncovers novel bits of
for local monetary forms. The CEE
knowledge and fascinating elements
nations demonstrate a high level of
of the cooperation among worldwide
homogeneity, showing a decent pre-
stock and cash markets. We separate
condition for joining the money
the whole time of 2002 to 2012 into
related union. Benkovskis et al.
two time interims, non-emergency
(2011) investigate the transmission
(20022006) and emergency (2007
of fiscal arrangement stuns from the
2012) periods. We find that
Euro range to Poland, Hungary, and
relationships display diverse conduct
the Czech Republic. They utilize a
amid the emergency time frame, for
component enlarged VAR (FAVAR)
example, higher securities exchange
model and demonstrate that there
connections and lower remote trade
are significant impacts of Euro
relationships when contrasted with
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 advanced comprehensively. In
exchange constriction in 2009. Fringe addition to other things, we archive
EU nations were hit especially hard in and measure clear moves toward net
2010-2011, with numerous money connectedness as the emergency
related establishments, as well as a unfurled. From the get-go, as dread
few governments, moving toward grasped the U.S. advertises in 2007-
liquidation. This foundation clarifies 2008, the heading was unmistakably
that understanding money related from the U.S. to Europe. (That is, it
organization connectedness is key might be said that we will in no time
for comprehension budgetary make exact, the U.S. was an
emergencies and their development. unmistakable net exporter of future
instability to Europe.) Then,
In this paper we add to such a
beginning in late 2008 as Lehman
comprehension with a point by point
Brothers fizzled and Europe got to be
investigation of connectedness both
distinctly involved in the emergency,
inside and between U.S. what's
connectedness turned out to be a
more, European monetary
great deal more similarly bi-
foundations, 2004-2014, a period
directional. At last, later in 2011 as
that incorporates all periods of the
the wellbeing of EU monetary
Great Crisis. Our investigation and
foundations crumbled, the adjust
results go from the granular
tipped the other way; we report an
(pairwise connectedness of individual
exceptional surge in net directional
organizations) to the aggregative
connectedness from European to U.S.
(aggregate framework wide
money related foundations.
connectedness), and from static
(genuine, or "normal," 3. Empirical Methodology
connectedness over the full
specimen) to dynamic (restrictive We utilize the directional
connectedness and its developments connectedness measures that are
amid specific scenes). Our introduced by Diebold and Yilmaz
commitment is audaciously (2012, 2014, 2015). The objective of
experimental as opposed to this econometric method is to
compute various interesting
methodological, as we have built up
measures from the transmissions of
the fundamental methodological
implied volatilities in a system that
econometric system in a progression contains
of prior papers (Diebold and Yilmaz the energy market and the
(2009), Diebold and Yilmaz (2012), allowances included in the study.
Diebold and Yilmaz (2014)) as Assume that implied volatility
brought together in Diebold and indices, IVi are modelled as a vector
Yilmaz (2015). The new commitment, autoregressive process, VAR(p) that
then, is the substantive can be written as
investigation, in view of another p
dataset that incorporates budgetary
IVi = IVt-i + t
foundations on both sides of the i=1
Atlantic. The outcomes supplement
(1)
and essentially broaden Diebold and
Yilmaz (2014), who concentrated just where is a NN matrix of
U.S. budgetary organizations thus parameters to be estimated. Also
could say nothing in regards to trans- assume that the vector of error
Atlantic linkages, in spite of their terms is independently and
significance as the emergency identically distributed with zero
mean, and covariance matrix. If g
ij (H) for H=1,2,
decompositions
the VAR system above is covariance
stationary, then there exists a , is computed as
moving average representation that H 1
2
jj (e i A h e j)
'
1
is given by IVt = A t-i, where g h=0
i=0 ij (H) = H 1

the NN coefficient matrices Ai obey (e'i A h A 'h ei )

a recursion of the form h=0

Ai=1Ai1+2Ai2+ +pAip (2)

with A0 is the NN identity matrix
and Ak=0 for k<0. where is the variance matrix of the
vector of errors , and jj is the
standard deviation of the error term
The moving average coefficients are of the jth market. Finally, ei is a
important to understand the selection vector with one on the ith
dynamics given that the variance element, and zero otherwise. In order
decompositions are computed as to get a unit sum of each row of the
transformation of the coefficients in variance decomposition, Diebold and
the moving average representation Yilmaz normalize each entry of the
above. The variance decompositions matrix by the row sum as
(or impulse responses) allow us to ijg (H )
split the H-step ahead of forecast g N
errors of each variable into parts that ij (H) =
can be attributable to the various gij(H )
j=1
market shocks. The aggregation of
these decompositions will be (3)
subsequently used to compute the
Note the sum of decompositions
directional connectedness of a
across any particular market
particular market to any or to all of N
the markets under study. ij g (H) =1, and across markets
j=1
The variance decompositions
computation is usually done using N

orthogonal VAR shocks. The Cholesky ijg (H) =N. Therefore,

g
ij (H )
j=1
identification scheme achieves
orthogonality but the computed can be seen as a natural measure of
variance decompositions will then be the pairwise directional
unstable and dependent on the connectedness from market j to
ordering of the markets. Thus, market i at horizon H. To make Eq.
Cholesky decomposition is not (4) more intuitive, we use the
suitable. A framework that produces notation Ci j(H) to represent this
invariant decompositions is the transmission. In the same way, we
generalized VAR that allows also compute the pairwise directional
correlated shocks and accounts for connectedness in the opposite
them appropriately. The framework direction as Cji(H). The two
has been first proposed by Koop et statistics allow us to compute the net
al. (1996) and Pesaran and Shin pairwise directional connectedness
(1998) and is called the KPPS as
hereinafter. Following Diebold and
Yilmaz, the KPPS H-step-ahead Cij= Ci j(H) - Ci j(H)
forecast error variance (4)
These are interesting statistics that
indicate which market is playing the
dominant role in the information connectedness in all markets is given
transmissions between the two by
markets. N

In our case, we are particularly ijg ( H )

j =1
interested in determining how all i j
markets together are contributing to C(H) = N
=
a single market, so we aggregate ij
g
( H)
partially. The total directional i , j=1
connectedness from all markets to N
market i, denoted by Ci(H), is ijg ( H )
computed as j=1
i j (8)
N
N
ijg ( H )
j =1
Ci(H) =
i j 100 This represents only the ratio of the
N
sum of all off diagonal elements in
ijg ( H) the variance decomposition matrix of
i , j=1
all markets to the sum of all
(5) elements (off diagonal and own
shocks). It also measures the total
Using the same logic, we are also information flow among all markets
able to compute how a particular under consideration.
market i is contributing to the shocks
of all other markets by aggregating 3.1 Relationship to the Network
partially. The total directional Literature
connectedness from market i to all
markets, denoted by Ci(H), is Systems are wherever in current life,
computed as from power networks to Facebook. Of
course, research on systems has
N developed dangerously in late
jig ( H ) years.6 A system N is made out of N
j =1
hubs and L interfaces between hubs.
Ci(H) =
j i 100
N The separation sij between two hubs
g
ji ( H) i and j is the most modest number of
i , j=1 connections that must be crossed to
go from i to j. N is associated if sij
(6)
<= N-1 i; j, and one is actually
This is also an informative prompted to consider measures of
connectedness measure. Together the quality of system connectedness.
with the previous statistics they may That is, apparently two associated
define the role of the market in the systems require not be similarly
whole system of markets as a net firmly associated. In any case, then
transmitter or receiver of shocks. In profound inquiries emerge. Exactly
particular, we are occasionally what is quality of system
interested in computing the net total connectedness? Is it a pairwise or
directional connectedness which can framework wide idea, or both, or not
be calculated as one or the other? How, if by any
means, may it be identified with the
Ci(H) = Ci(H) - Ci(H) thought of connectedness that we
(7) have proposed freely and hitherto
The total aggregation of the variance underscored, in view of difference
decompositions across all markets disintegrations? To approach the
measures the system wide issue of measuring system
connectedness. The total connectedness, we have to examine
the numerical structure of systems
more profoundly. A system is
basically a NxN nearness grid An of
ones, A = [Aij ], where Aij = 1 if hubs
i and j are connected, and Aij = 0
generally. Take note of that An is
symmetric, in light of the fact that in
the event that i and j are associated,
then so excessively should be j and i.
Scientifically (i.e., arithmetically), the
contiguousness framework An is the
system, and all system properties
are inserted in A. Thus any sensible
connectedness measure must be
founded on A. By the by, there is no
single, widely inclusive measure, and
a few have been proposed.7 The
most essential and prominent by a
long shot { and in addition the most
helpful for our motivations {are in
light of the possibility of hub degree
(and a firmly related idea, arrange
width), to which we now turn.
3.1.1 Degree and Diameter
A hub's degree is its number of
connections to different hubs.
Quickly the level of hub i is
N N
i= Aij = A ji
j=1 j=1
We can obviously analyze the
example of degrees crosswise over
hubs. The degree dispersion is the
likelihood circulation of degrees
crosswise over hubs. It is a discrete
univariate dispersion with bolster
0, .,(N - 1), and parts of its shape
(area, scale, skewness, tail thickness,
and so forth.) are firmly connected to
parts of system behavior.8 As
respects the part of system conduct
that worries us {connectedness {the
area of the degree dissemination is
clearly key, and the standard area
measure is obviously the mean.
Henceforth the mean of the degree
dissemination ("mean degree") has
risen as an authoritative benchmark
measure of general system
connectedness. The bigger the mean
degree, the more prominent is
general system connectedness.
The simply depicted nearness lattice
and degree dissemination may all
the more unequivocally be
called "1-stage," as the connections
are immediate. In any case,
regardless of the possibility that i is
not straightforwardly connected to j,
i might be connected to k, and k to j,
so that i and j are connected at a
separation of two stages as opposed
to one. The refinement between 1-
stage and multi-step contiguousness
smphasizes remove. Review that, as
presented prior, the separation sij
between two hubs i and j is the most
modest number of connections that
must be crossed to go from i to j.
Separation is a two-hub property, as
opposed to degree, which is a
solitary hub property. Firmly
identified with separation is the
possibility of breadth. The width of a
system is the greatest separation
between any two hubs, smax =
maxi;jsij . Breadth is another
sanctioned benchmark measure of
general system connectedness. The
littler the system distance across, the
more noteworthy is general
connectedness. An excellent
substantial N estimation relates
arrange width, organize mean
degree and system measure in
Erdos-Renyi irregular systems (Erdos
and Renyi (1959))
ln N
s max
ln E( )
This "arrange breadth becomes just
as lnN" guess is regularly presented
as a scientifically exact portrayal of
the "little world" marvel, to be
specific that distances across have a
tendency to be little notwithstanding
for enormous systems. For our
motivations, nonetheless, it is helpful
on the grounds that it accentuates in
an extremely exact manner the
centrality of the mean degree as a
measure of system connectedness.
As we might now observe, our prior
may, are preferably more modern
than the established system
structures portrayed up to this point.
Initially, the contiguousness lattice A
(fluctuation decay network D) is not
filled essentially with 0-1 sections;
rather, the passages are weights,
with some possibly solid and others
conceivably feeble. Second, the
connections are coordinated; that is,
the quality of the ij connection is not
really the same as that of the ji
interface, so the contiguousness
lattice is for the most part not
symmetric. Third, there are
limitations on the column entireties
of A. Specifically, each line must total
to 1 in light of the fact that the
passages are fluctuation offers.
Consequently we compose the
corner to corner components as
N
A ii =1 A ij
j=1 . Note specifically
ji

proposed connectedness measures that the corner to corner components

are personally identified with certain of An are no longer 0. Weighted,
system hub degrees and mean coordinated renditions of the before
degree. presented arrange connectedness
3.1.2 Variance Decompositions as measurements are promptly
Weighted, Directed Networks characterized, including degrees,
degree disseminations, separations
Strangely, for reasons unknown our and breadths. For illustration, hub
connectedness measures, early degrees are currently acquired not
variations of which were proposed in by summing ones, but instead by
Diebold and Yilmaz (2009) freely of summing weights in [0; 1]. Besides,
the system writing, are firmly there are presently "to-degrees" and
identified with parts of system "from-degrees," relating to line
connectedness. Without a doubt, we wholes and segment aggregates. The
are currently in a position to notice N
= Aij

that change deteriorations are 1
from-level of hub I is .
systems. All the more unequivocally, j=1
j i
the difference decay grid D, which
characterizes our connectedness The from-degree conveyance is the
table and all related connectedness likelihood circulation of from degrees
measures, is a system crosswise over hubs. It is a univariate
contiguousness framework A. conveyance with support on [0; 1].
Henceforth arrange connectedness Correspondingly, the to-level of hub j
N
measures might be utilized as a part
of conjunction with fluctuation 1= Aij
is i=1 . The to-degree
deteriorations to comprehend i j
connectedness among segments.
circulation is the likelihood
The systems characterized by dissemination of to degrees
change disintegrations, be that as it
 crosswise over hubs. It is a univariate
dispersion with support on [0;N].
At this point the connections
between our prior characterized
connectedness measures and those
utilized as a part of the system
writing ought to be evident. To start
with, our aggregate directional
connectedness measures Ci .
what's more, C. j are exactly the
4.
5. Graph 1: Eastern European Currency vs their return from 1st Jan, 2005
6.
from-degrees and to-degrees,
individually, related with the notes of
the weighted coordinated system D.
Second, our aggregate
connectedness measure C is just the
mean level of the system D (to or
from {it's the same in any case, in
light of the fact that the entirety of
all line entireties must equivalent the
total of all section wholes).
7.

Table 01: Descriptive Statistics of Eastern European Currency against USD

8.

Table 02: Descriptive Statistics of Eastern European Currency against USD

log volatility changes
9.

Table 03: Unconditional correlation among the Eastern European Currency

market
10.

Table 04: Unconditional correlation among the Eastern European Currency

market returns
11.
 12.

13. Graph 2: Eastern European Stock index vs their return from 1st Jan, 2005

14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.

Table 05: Descriptive Statistics of Eastern European Stock Index

27.

Table 06: Descriptive Statistics of Eastern European Stock Index log

volatility changes
28.

Table 07: Unconditional correlation among the Eastern European Stock

Index
29.

Table 08: Unconditional correlation among the Eastern European Stock

Index Return
30.

31. Table 09: Currency Connectedness

32.
33.

Table 10: Equity Connectedness

34.
35.
36.
37.
38.
39.

40. Graph 3 : Total directional connectedness from others of currency markets

41.

42. Graph 4: Total directional connectedness to others for currency markets

43.

44. Graph 5: Total Net directional connectedness for currency markets

45.

46. Graph 6: Pairwise dynamic connectedness to others for currency markets

47.
48. Graph 7: Total connectedness for currency markets
49.

50. Graph 8: Total directional connectedness from others for equity markets

51.
52. Graph 9: Total directional connectedness to others for equity markets

53.

54. Graph 10: Total net directional connectedness for currency markets
55.

56. Graph 11: Net Pairwise directional connectedness for equity markets

57.
 58.
59. Graph 12: Total volatility connectedness for equity markets

60. Data and its analysis u

n
60.1. Preliminary Statistics
t
61. As afore mentioned the r
y
data was collected about the
65.A
stock market index and log u
return from the period of 1st s
66.ATX
Jan, 2005 to 23rd Dec, 2016 for t 67.NA
INDEX
Austria, Serbia, Romania, r
Bosnia, Hungary, Croatia, i
a
Cyprus, Russia, Malta, 68.S
Macedonia, Ukraine, Czech e
Republic, Latvia, Slovenia, 69.BELEX 70.RSD
r
LIN CUR
Slovakia, Bulgaria, Estonia, b
INDEX NCY
Tunisia, Lithuania, Poland and i
Turkey. The data for currency a
71.R
market of Albania, Czech o
Republic, Euro, Croatia, m 73.ROL
Hungary, Macedonia, Polish, 72.BET
a CUR
INDEX
Romania, Serbia, Russia, n NCY
Tunisia, Turkey and Ukraine i
a
from the period of 3rd Jan 2005
74.B
to 23rd Dec,2016. Stock index o
and Currency data comprise s 75.BIRS
76.NA
daily closing price and the n INDEX
symbols of the indices under i
study are: a
77.H 78.BUX 79.HUN
62.C 63.Index 64.Curr u INDEX GARY
o Code ency n
 g i
INDEX
a a
r 104.
105.
y Russ 106.
RTSSTD
80.C i RUSSIA
INDEX
r a
o 82.HRK 107.
81.CRO
a CUR Slov
INDEX 108.
t NCY e 109.
SBITOP
i n NA
INDEX
a i
83.C a
y 110.
84.CYSM
p Slov
MAPA 85.NA 111.
r a 112.
INDEX SKSM
u k NA
INDEX
s i
86.R a
u 113.
87.INDEX
s 88.RUSS Bulg
CF 114.
s IA a 115.
INDEX SOFIX
i r NA
INDEX
a i
89.M a
a 90.MALTE 116.
l X 91.NA Esto 117.
118.
t INDEX n TALSE
NA
a i INDEX
92.M a
a 119.
121.
c Tuni 120.
TND
e 94.MKD s TUSISE
93.MBI CUR
d CUR i INDEX
INDEX NCY
o NCY a
n 122.
i Lith
a u 123.
124.
95.U a VILSE
NA
k n INDEX
r i
96.PFTS 97.UKAR
a a
INDEX AINE
i 125. 127.
126.
n Pola PLN
WIG
e n CUR
INDEX
98.C d NCY
z 128. 130.
129.
e Turk TRL
XU100
c e CUR
INDEX
h y NCY
100.
131.
99.PX CZECH 133.
R Alba
INDEX REPU 132. ALL
e n
BLIC NA CUR
p i
NCY
u a
b 136.
li 134. 135. EUR
c Euro NA CUR
101. 102. 103. NCY
Latv RIGSE NA 137. 138. 139.
Serb RSD
i NA CUR
a NCY
140.
141. Graph 01 displays the
time series plot of Currency
indices and the return over the
sample period. As seen from
the Graph all the currency
market except Russia and
Czech Republic show three
major drops in indices during
periods of 2008, 2011, 2014.
This shows the regional
connectedness among the
Eastern European Economies.
Czech Republic and Russian
currency market faced a crisis
during 2014 when Crimea
143.
annexation happened. During
that period, we can see plunge
in the Ukraine currency
market. The financial crisis of
2007 -08 shows its impact on
each of the sample nations.
The same can be said about
the 2011 EU debt crisis. The
Euro has still not recovered
from the debt crisis and shows
significant impact on EU
nations, which dont have Euro
as their currency.
142. Table 01 & 02 report the
summary statistics of the
levels and the log changes of
currency market of the sample
nations. Studying these tables
closely gives us insight about
144.
the currency markets
behaviour of these nations.
The mean is highest for old
Romanian Leu(Ron) and old
Turkish Lira (TRY). This is due
to change in currency by the
Romanian & Turkish
government. They brought in
4th Leu & 2nd Lira in effect in
2005, so the data for old
currency can be overlooked.
Apart from them, the Russian
Ruble and Albanian Lek have
highest mean. Looking at the
skewness and kurtosis
columns gives us perspective
about symmetry and
normality. If we look closely,
the data set for currency is
positively skewed except for
Euro, which is approximately
symmetric. The data for
Russian, Czech Republic,
Turkey, Romania & Tunisia is
highly skewed. Most of the
currency market is close to
normal except for Russia and
Ukraine, which might be due
to Russian currency crisis of
2014.
Observing returns data,
shows all the currency are
giving positive return except
for that of Euro which has
been falling since 2011 debt
crisis, then Russian crisis and
after that effect of BREXIT in
2016. The Russian, Hungarian
and Czech Republican
currency show high standard
deviations in returns, meaning
their returns are highly
volatile. The Jarque- Bera test
shows that none of the data
sample are completely normal
and symmetric and p-value of
0 for all sample nations rejects
our hypothesis of a normal
sample.
Table 03 & 04 shows us
the correlation between the
sample nations currency
market and their returns. Stark
observation is that the Euro is
negative correlated with all
the other sample nations
currency. All the other other
countries are highly correlated
with each other signifying
dependence among each
other except for Ukraine,
which has positive low
 correlation with most of
countries. This shows how
deeply dependent are the
currency market on the
neighbouring countries market
and trade.
145. Graph 02 displays the
time series plot of Stock
market index of sample
nations and their return. We
can observe from the graphs
and specifically pin point the
financial crisis years, which is,
symbolize by trough in the plot
of the index. All the indexes
move in a sync manner expect
for the Russian indices which
were not fazed that
significantly by 2011 EU debt
crisis. All the sample nations
indices peaked in 2007, which
most of them have not been
able to achieve even eight
years after the crisis.
Bulgarian, Macedonian,
Croatian, Bosnian, Serbian and
Slovenian indices have not
been able to recover from the
2008 crisis, as the index has
not shown an upward trend.
Tunisian and Turkish markets
have shown significant
positive movement after the
2008 crisis, unfazed by the
movements of indices in the
region.
146.
147. Table 05 & 06 report the
summary statistics of the
levels and the log changes of
stock market of the sample
nations. Initial observation of
stock market indices mean
data shows that the Polish,
Turkish, Russian and
Hungarian markets have
highest means, but if we look
closely, only Turkish, Tunisian
and Russian market have high
returns. At same time if we
observe the standard
deviation column, it is clear
that the Russian, Turkish &
Cyprus markets have highest
volatility. Only the Tunisian
market is the one, which is
giving high returns at the
lowest volatility. Looking at
measure for symmetry, we can
infer that many markets are
moderately skewed to left.
Macedonian, Serbian, Bosnian
and Croatian markets are
highly skewed to the right. The
same Macedonian, Serbian,
Bosnian and Croatian markets
are leptokurtic. The markets,
which have close to normal
data, are Austrian, Ukrainian,
Lithuanian, Hungarian and
Polish indices. The Jarque-
Bera test shows that most of
the data sample are
completely normal and
symmetric and p-value of 0 for
all sample nations rejects our
hypothesis of a normal
sample. The Romanian, Polish
and Hungarian markets data
is close to normality and
symmetry as they have low
Jarque- Bera test score.
148. Table 03 & 04 shows us
the correlation between the
sample nations stock market
and their returns. One clear
observation is that the
Tunisian market is negative
correlation with the rest of the
sample countries except for
Estonia and Turkey. Even
Turkey shows similar
behaviour and is negatively
correlated with many sample
nations. We can also observe
that Austrian, Serbian,
Bosnian, Cyprus, Croatian,
Czech and Macedonian
markets have high correlation
 among each other, which currency to Romanian
significantly displays the currency but is significantly
dependence on neighbourhood low. The Euro currency index
countries economy. Bosnian, has significantly high impact
Maltese and Slovakian on other nations currency.
markets have low return And the vice versa is also true,
correlation with other sample as all sample nations currency
nations. except for Russian and Czech
Republican currency has
149. Results and its analysis
significantly high
149.1. Static volatility
connectedness with Euro. The
connectedness analysis
Russian and Czech Republican
150. The matrix presented currencies show very low
in Table 9 reports the full connectedness with all the
sample cross-market sample nation and their
connectedness of currency highest connectedness is with
indices. The diagonal each other at 0.17% and 0.4%.
elements of the matrix Therefore, Czech Republican
represent the own market currency has positive net
connectedness and are not connectedness with Russia,
particularly interesting in our but is not very significant.
context. The off diagonal
152. Except for Euro, the
elements (i.e. Cij(H)) of the
Ukrainian, Turkish, Hungarian
matrix measure the pairwise
and Polish (PLN) currency
volatility directional
indices have higher
connections and are
connectedness to others as
particularly important for our
compared to other sample
study. Most importantly is the
nations currency indices.
first column of Table 10 which
There total connectedness
measures the directional
from these countries to others
connectedness from the Euro
are Ukrainian: 99.54%,
to other currency market (i.e.
Turkish: 98.30%, Hungarian:
CjEUR(H)). Similarly, the first
96.64% and Polish (PLN):
row of the table is important
95.91%. Their total net
as it measures the directional
connectedness being 14.45%,
connectedness into the
13.39%, 12.36% and 11.57%.
Eurocurrency from currency
This shows that shocks are
markets (i.e. CEURi(H)).
being transferred from the
151. The highest relatively developed
connectedness in the table is economies to the developing
from Turkish currency market nations of this sample. The
to Romanian currency market Euro as we guessed has
(ROL) at 14.31%. While the highest total connectedness to
connectedness from Romanian others, total connected from
currency to Turkish currency is others and total net
12.94%. The difference connectedness at 114.32%,
between the two pairwise 86.65% and 27.68%
connectedness measures respectively. The lowest total
implies that the net pairwise connectedness to others is
connectedness is from Turkish shown by Czech Republic and
 Russian currencies. Czech 154. The highest
Republics total connectedness connectedness in the table is
to others and total net from Austrian equity market to
connectedness are 0.68% and Czech Republic equity market
-1.16%. While that of Russia (PX) at 11.61%. While the
are 0.67% and -1.14%. The connectedness from Czech
lowest total net Republican to Austrian equity
connectedness is shown by market is 12%. The difference
Macedonia. Its total between the two pairwise
connectedness to others and connectedness measures
total net connectedness are implies that the net pairwise
19.74% and -47.43%. The connectedness is from Czech
impact of Russian currency Republic to Austrian market,
has diminished in the recent but is not very significant. The
decade and this is evident Slovakian equity market
from the data. After the (SKSM) has very low
movement of nations out of connectedness with all the
communist rule towards sample nations, the highest
democracy, this data shows being 0.19% with Maltese
diminishing role of Russia in index. The same is observed
Eastern Europe. for the Maltese index
(MALTEX), which is having its
153. The matrix presented
highest connectedness with
in Table 10 reports the full
Ukraine index at 0.24%.
sample cross-market
Austrian, Polish (WIG), Czech
connectedness of equity
Republican, Hungarian (BUX)
indices. The diagonal
high inter connectedness
elements of the matrix
among each as compared to
represent the own market
other sample countries equity
connectedness and are not
market connectedness. Out of
particularly interesting in our
these four, important partner
context. The off diagonal
is Czech Republic as net
elements (i.e. Cij(H)) of the
connectedness in all cases is
matrix measure the pairwise
from Czech Republic to other
volatility directional
three nation. These results are
connections and are
clear evidence that shocks are
particularly important for our
transferred to neighbouring
study. Most importantly is the
countries economy and
first column of Table 10 which
market indexes. There is
measures the directional
strong connectedness
connectedness from the
between these 4 nations and
Austrian to other equity
both Russian equity indices
market (i.e. CjATX(H)).
(RTSSTD & INDEXCF), but this
Similarly, the first row of the
is still less than inter
table is important as it
connectedness of Austrian,
measures the directional
Polish, Czech Republican and
connectedness into the
Hungarian equity indices.
Austrian market from other
equity markets (i.e. 155. Czech Republican and
CATXi(H)). Austrian markets have highest
total connectedness to others
 at 114.82% and 109.58%. well as equity market for same
They also have highest total countries as mentioned above.
net connectedness to others The graphs plotted shows five
at 37.20 and 33.32. This different types of dynamic
means they have highest connectedness. The first one is
impact on other sample in From_currency /from_equity
nations equity indexes. The which shows who is the most
affected entity from all others,
Slovakian and Maltese equity
in To_currency/ to_equity
index have lowest total
graphsit is shown which entity
connectedness at 1.23% and is most affecting to all others.
2.31% respectively to others Next is Net_currency/
as their economy does not Net_equity which reflects who
have a significant impact on is the net transmitter of
the Eastern European shocks, who is the net receiver
economies. The nations having of the shocks. In
lowest total net Pairwise_currecny/Pairwise_eq
connectedness are Serbia uity, we see which pairs are
(BELEXLIN) and Macedonia strongly connected, who is
(MBI) stock exchanges at receiving shocks from whom,
-21.35% and -20.45% who is transmitting shocks and
respectively. This observation to whom. Such pairs can be
proves that the size of easily identified through Static
Connectedness Table/Matrix.
economy defines its impact of
neighbouring nations.
158. Graph 3, first graph
155.1. Dynamic volatility presents plots of total
connectedness analysis directional connectedness of
currency originating from
156. The static other currency markets and
connectedness analysis transmitting to the Euro
provides a good market (i.e.CEuro(H)).
characterization of the Graph 4 presents the
connectedness of implied transmissions of Euro
volatilities over the full sample currency markets in the
period. However, it is not opposite direction (i.e. from
helpful in understanding how Euro to the all currency
connectedness changes over markets) (i.e. CEur(H)). The
time, to assess the extent and net transmissions are
nature of connectedness over presented in Graph 5 (i.e.
time we use the corresponding Ci(H)). Graph 6 present the
time series of the total pairwise connectedness for
directional connectedness the sample currency markets.
measure. To understand the The total connectedness of the
change in connectedness over sample countries over a time
time, we observe the extent period is shown in Graph 7.
and nature of connectedness
over time using the total 159. We can observe from
directional connectedness graphs of currency markets,
graphs. the diminishing dependence of
currency markets of sample
157. The dynamic countries on Euro market. If
connectedness has been we see in Graph 3 Total
captured for both currency as directional connectedness
 from others of currency after the 2008 crisis. The dip
markets, we can observe in 2014 in the graph for
large fluctuation in Romania in 2014 shows that is
connectedness to the Czech less effected in accordance to
Republic and Russian markets. the president election being
While Euro currency has taken place in the country. The
diminishing connectedness To_currency graph shows that
onto itself from others. The Russia influenced the rest of
currency markets of Poland, the eastern European
Romania, Macedonia and countries more as it is one of
Tunisia have observed drop in the stable countries among
their connectedness from them. During the election time
others in 2015. The Polish in Romania, we observe that it
currency again suffered in was also influencing the rest of
2016 due to the effect the European countries after
of Polish Constitutional Court Russia. Macedonian also
crisis, 2015. observed general election
during the period of 2014. In
160. If we see in Graph 4 addition, Winter Olympics
Total directional 2014 was taking place. The
connectedness to others of net effect is majorly seen for
currency markets, we can Russia, Romania and
observe the connectedness Macedonian.
from Euro market fluctuate
during the financial crisis 162. This is due to the fact
periods. The Russian market there has been a crisis
has sudden peaks in those situation arising out of the
periods, as the sample Eastern European Union due to debt
European countries move crisis. In the net
according to Russian market in connectedness graph we can
that period. The Serbian, observe drops in the
Tunisian and Turkish currency connectedness during the
shows fluctuation during the specific years of 2008, 2011
sample period, as the and 2014 for relatively
countries are not highly developed economies. In the
effected by their currency developing economies like
movement. If we see Graph 5 Macedonia and Romania, no
Total net directional such trend is clearly
connectedness currency observable. Even we see
markets, we can observe the in Graph 7 Total
Russian net connectedness directional
has remained low over sample connectedness we can
period, spiking during crisis observe the clear effect of
situations. The currency, which financial crisis years, where
have high connectedness on there is sudden dip in the total
an average other than Euro, connectedness.
are Austrian, Hungarian,
Serbian, Tunisian and Turkish. 163. Graph 8, first graph
presents plots of total
161. From the currency directional connectedness of
graphs we see, Russian and equity originating from other
Romanian currency to be less equity markets and
effected as compared to other transmitting to the Austrian
countries much especially market (i.e. CATX(H)).
 Graph 9 presents the come down to the level of the
transmissions of Austrian 2005 era, when many new
equity markets in the opposite nations of the sample joined
direction (from the Austrian European Union. We can safely
market to all equity markets) say there is high
(i.e. CATX(H)). The net connectedness in Eastern
transmissions are presented in European economies, which is
Graph 10 (i.e. Ci(H)). Graph 11 stressed outby the crisis
present the pairwise situation of the region or
connectedness for the sample global financial crisis.
equity markets. The total
connectedness of the sample 165. Total connectedness
countries over a time period is moves in smaller steps rather
shown in Graph 12. than discrete jumps, total
return connectedness across
164. From the equity graphs, global stock markets increase
we can observe that all the over time. Each graph of
sample countries are moving pairwise connectedness
in accord in the From and To entails a N(0,1) matrix of
graphs. The developed pairwise directional
economies like Poland, connectedness plots among
Croatia, Austria and Hungary each pair of stock markets as
have higher connectedness well as currency markets. It an
towards others, thereby their also be observed that for all
net connectedness is higher. the countries, own
This is due to the fact they are connectedness decrease over
part of European Union, while time.
all the other sample countries
are not. In the graphs, the 166. Euro currency shows
diminishing role of Russian high pairwise connectedness
economy on the sample with Ukraine, Turkey and
countries economy is Czech republic and less
observable. Due to the pairwise connectedness with
sanctions imposed on Russia Russian currency. These were
in 2014-15, The effect is the markets with high total
clearly evident in From and To connectedness and hence this
graphs. Highest net behaviour. Regional factor is
connectedness over a period also an important factor to
of time is observable for describe such high
Poland, Croatia, Austria and connectedness. Talking in
Hungary, which occupy a more terms of equity markets, we
central position in Europe see high connectedness
relative to sample countries. between Estonia and Hungary.
The trait which was observable Majority of the connectedness
in Total connectedness graph is low showing low correlation
of currency is observable even between stock markets of
in the equity Total countries.
connectedness graph. The
years of financial crisis have 167. From_Equity graph
put a stress on the shows that Crotia, Russia and
connectedness between these Ukraine have the most upward
sample nations. After reaching plots and that shows the
heights in the 2007-08 region, continuos increase in their
the total connectedness has returns, and hence the shape
 of the graph. While for rest of
the countries the returns have
been averaged out. To_Equity
graph shows that Latvia,
Slovakia and Crotia are being
affected by other countires
change in stock market. The
net connectedness is high for
Austria and Russia.
168. Conclusion
169. The connectedness
among countries has been
studies in two parts: static
connectedness and dynamic
connectedness. There are
countries governing most of
the impact; for example,
Russia- we see that in static as
well as in dynamic
connectedness this was the
country impacting other
currency market and equity
market. After break down of
Soviet Union in 1991, Russia
emerged as a strong nation
among it. It has relatively
stable economy and
government. The laws and
policy are also economically
friendly, hence we have
investments coming from this
country. Hence, the impact is
more from from Russia.
Countries near Russia like
Czech Republic, Romania,
Macdonian, Turkey, and so on
are impacted the most. The
volatility is also high for
Russia. Small countries like
Tunisia have less volatility and
high returns which shows that
the countries dont take much
risk in equity market.
170. In terms of correlation,
almost all the eastern
European countries are highly
correlated with each other
signifying dependence among
each other except for Ukraine
and Malta, which has positive
low correlation with most of
countries. Strong dependent of
the currency market on the
neighbouring countries market
and trade can be deduced
from it. In terms of stock
market, we the Tunisian
market is negative correlation
with the rest of the sample
countries except for Estonia
and Turkey. Even Turkey shows
similar behaviour and is
negatively correlated with
many sample nations. For
Dynamic connectedness, we
see the political factors play
an important role. General
elections or presidential
elections make the market
roar. High expectations from
the new government and
change in the reign make the
return value high for both
currency and stock market.
171. For nations like Poland,
Hungary, Austria and Croatia,
which occupy central position
relative to sample nations, the
connectedness is more
evident in both currency and
equity market. The reason for
their high connectedness is
that these countries joined EU
in 2004 or earlier, which is
showing their power as more
stable economy in the region.
Another conclusion, which we
can draw, is these Eastern
European countries have
diminishing connectedness
with Russian economy, which
once they were part of. The
financial crisis of Europe or
Russia has similar effects,
while a global crisis like that of
2008 has impact on all
countries stock and currency
market.
 172.
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