This paper examines financial market comovements across European transition economies and compares their experience to that of other regions. Correlations in monthly indices of exchange market pressures can partly be explained by direct trade linkages, but not by measures of other fundamentals. A look at higher-frequency data during three crisis periods reveals the presence of structural breaks in the relationship between exchange-, but not stock markets. While the reaction of markets during the Asian and Czech crises is muted, the pattern of high-frequency spillovers during the Russian crisis looks very similar to that observed in other regions during turbulent times | IMF Working Paper This is a Working Paper and the author s would 2000 International Monetary Fund welcome rany comment s on the present text- Citations should refer to a Working Paper of the International Monetary Fund. The views expressed are those of the author s and do not necessarily represent those of the Fund. WP 99 INTERNATIONAL MONETARY FUND Research Department Financial Market Spillovers in Transition Economies Prepared by R. Gaston Gelos and Ratna Sahay1 preliminary November 1999 Abstract This paper examines financial market comovements across European transition economies and compares their experience to that of other regions. Correlations in monthly indices of exchange market pressures can partly be explained by direct trade linkages but not by measures of other fundamentals. A look at higher-frequency data during three crisis periods reveals the presence of structural breaks in the relationship between exchange- but not stock markets. While the reaction of markets during the Asian and Czech crises is muted the pattern of high-frequency spillovers during the Russian crisis looks very similar to that observed in other regions during turbulent times. JEL Classification Numbers F30 G15 P34 Keywords Stock Markets contagion transition economies speculative attacks Author s E-Mail Address ggelos@ rsahay@ 1 The authors wish to thank Tamim Bayoumi Craig Beaumont Torbjörn Becker Andrew Berg Mark de Broeck Balazs Horvath Laura Kodres Thomas Laursen Neven Mates Nada Mora Sanjaya Panth Uma Ramakrishnan Anthony Richards Roberto Rigobon Kevin Ross Robert Wescott Ann-Margret Westin Charles Wyplosz and seminar participants from the European I Department of the IMF for helpful discussions and comments. Grace Juhn and Freyan Panthaki provided excellent research assistance. - 2 - Contents Financial Market Spillovers in Transition I. II. A. Possible Propagation B. Trade C. Financial Sector Linkages
