Empirical contributions

5.1.1 Contribution in the area of risk pricing

Habitual patterns for developed financial markets are not necessarily present in emerging markets; consequently, devising ways to price risk and distinguish the influences of global and local sources of risk are inherently challenging for researchers. Nevertheless, the rapid transformations of risk and capital market reforms offer a unique platform for an original analysis of risk pricing.

This thesis contributes to empirical research literature on the pricing of risk by providing evidence of stock market segmentation in Emerging Eastern Europe.

Moreover, it is claimed that aggregate emerging market risk, as opposed to global market risk, appears to be the relevant driver of stock market returns that can be used for the pricing and forecasting of assets in emerging markets. Articles 1 and 2 of this dissertation demonstrate that currency risk is priced into emerging markets and that the difference between local and global interest rates may be used to model the time variation in the betas for global and local sources of risk. This variable is arguably key in measuring local economic conditions and financial stability and thus suitable for modeling risk sensitivity (Article 1).

5.1.2 Contribution in the area of market integration

Emerging Eastern European stock and currency markets are examined in a setting of regional influences. From the research perspective, these markets offer a dynamic natural experiment in opening up to foreign investment and world trade as well as increasing exposure to external shocks from global and regional financial markets.

Therefore, this thesis contributes to empirical research on financial market integration by providing evidence that equity markets and foreign exchange rates in Emerging Eastern Europe are linked in terms of both volatility and returns. The results show that pricing of securities at stock markets and FX rates are interdependent. With regard to interdependence between stock markets and FX rates, the spillovers found are

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primarily from FX rates to stock markets, suggesting that markets in Eastern Europe are integrated within the region (Article 2).

The study complements the research literature on integration effects and identifying opportunities for sectoral diversification in the selection of financial securities for investment portfolios. The importance of industries in Eastern European stock markets and the degree of market integration are considered before and after the 2004 accession to the EU. The study is the first to apply a GARCH-BEKK methodology to analyze interactions by sector in Emerging Eastern European markets (Article 3). The results presented in this thesis suggest that sectors of stock markets are interdependent in Emerging Eastern Europe. The Polish consumer goods sector, the Hungarian telecommunications sector and the Czech financial sector are to some extent less integrated with their sectoral counterparts compared to other industries. Thus, it is possible to construct the investment portfolio, which is partially isolated from changes in European stock market, by investing in assets of these particular sectors. Moreover, market integration after EU accession has increased, providing evidence of greater shock spillovers and, as consequence, susceptibility to contagion (Article 3).

The results further contribute to studies on integration by analyzing linkages between macroeconomic news releases and stock market performance in geographically proximate and otherwise related countries. The results suggest that stock markets follow macroeconomic announcements generated in the same geographical area.

These findings support the hypothesis of integration in Emerging Eastern Europe (Article 4).

5.1.3 Contribution in the area of shocks and volatility spillovers

The results presented complement the empirical research literature on shocks and volatility spillovers. By studying linkages between financial markets in Eastern Europe, this thesis has shown the presence of shock and volatility spillovers in equity markets of Emerging Eastern Europe.

This study contributes to research on spillovers between foreign exchange rates and equity markets, providing evidence of unidirectional volatility spillovers from FX rates to stock markets in most of EEE countries. The study also finds the impact of the foreign exchange rates on asset returns in the period under study (Article 2).

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Moreover, the results in this dissertation move knowledge on interactions between EEE countries and the EU. The estimated results suggest that shocks from one stock market spill over into other stock markets in Emerging Eastern Europe. However, there are particular stock markets sectors, which are partially segmented from European stock markets. Thus, utilizing the results of this dissertation it is possible to construct investment portfolio investing in these particular sectors, which will be partially segmented from European markets and might be more resistant to contagion effects. Moreover, the extent of spillovers between similar sectors increases after the 2004 EU accession (Article 3). Furthermore, macroeconomic news is found to affect commonly the volatility of the stock market and, in rare cases, asset pricing (Article 4).

5.1.4 Contribution in the area of macroeconomic announcements

The empirical literature lacks evidence on the impact of macroeconomic news released in geographically proximate and otherwise closely related areas on stock markets. The thesis contributes to the research on risk of contagion. The results in the dissertation show the significance of local and foreign macroeconomic releases on Eastern European stock markets.

The results provide evidence of the asymmetric effect in volatilities at the markets.

Moreover, the impact of various types of news is diverse. Specifically, shocks from negative news impact future volatility greater than shocks from positive news.

However, EEE markets follow identity of news, specifically, in Russia, Poland and the Czech Republic, macroeconomic releases related to consumer, external and industry sectors, the labor market and national accounts affect asset pricing. The news related to external, government and industry sectors, the labor market, money and finance, prices, surveys and cyclical indices impact price volatility to a lesser extent (Article 4).

The most important contribution in the area is that this study is among the first to analyze the impact of foreign macroeconomic news released in geographically proximate countries in Emerging Eastern Europe. The results suggest that the impact of foreign macroeconomic announcements (from closely geographically and otherwise related countries) on volatility differs significantly across markets. For

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example, Russian market follows macroeconomic releases from the Czech Republic, while Polish market follows changes in macroeconomic indicators in Russia. The Polish and Hungarian releases do not significantly impact any emerging stock markets in the study, suggesting that Poland and Hungary are less integrated with the EEE countries studied. Moreover, the foreign macroeconomic releases are more important for EEE markets compared with local macroeconomic news (Article 4).