Direct Identification of Crisis Periods on the CEE Stock Markets: The Influence of the 2007 U.S. Subprime Crisis

The main goal of this paper is a direct identification of crisis periods on the eight Central and Eastern European (CEE) stock markets, and, for comparison, on the U.S. market. We employ a statistical procedure of dividing market states into up and down markets. Our aim is to examine whether crisis periods are common in various countries, and the results confirm Oct 2007 – Feb 2009 as the common period of the recent global financial crisis, except for Slovakia. Moreover, we investigate the effect of increasing cross–market correlations in the crisis period in the context of contagion, applying both standard contemporaneous correlations and volatility-adjusted correlation coefficients. Our results confirm that accommodating heteroskedasticity is crucial for detecting contagion across stock markets. The data consists of monthly logarithmic returns of the major CEE and the U.S. stock market indexes, in the period May 2004 – April 2013.