Abstract

This paper studies the market integration of Poland, Hungary and the Czech Republic by utilizing the multivariate GARCH analysis of Engle and Kroner (1995) for which a BEKK representation is adopted. We investigate the transmission of the US subprime crisis across Poland, Hungary and the Czech Republic in a sectoral setting. In addition, we attempt to identify whether the three emerging Eastern European countries have become more integrated after their EU accessions in 2004, in a regional setting. Our results clearly indicate the existence of direct linkages between different stock market sectors with respect to returns and volatilities. We found that the transmission of equity shocks between markets has increased after the EU accession in 2004. Notably, the intra-industry contagion in emerging Europe has increased after this accession. Our findings have significant implications for asset pricing and portfolio selection for international financial institutions and financial managers.

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