Dilemma: Regional or International Interdependencies in Central and Eastern European Stock Markets

This paper examines the interdependencies between Emerging Europe (i.e. Bulgaria, the Czech Republic, Hungary, Poland, and Romania) and developed markets over the periods before and after the global crisis. A study of market integration is important, since the previously results in the literature are contradictory. Using a Vector Error Correction Model we tested two hypotheses, namely, regional integration in the pre-crisis period and international contagion in the post-crisis period. We find support for an increasing international interdependences in all Central and Eastern European countries except Bulgaria. It follows that the results of the study can be employed to formulate optimal portfolio diversification.