CEE Banking Sector Co-Movement: Contagion or Interdependence?

We study the evolution of global equity market integration using US dollar denominated iShares. Designed to mimic the movements of MSCI indices, these securities provide an easy pool of international diversification products for the investor. As such they allow us to conduct an analysis of the largest equity markets comovements devoid of problems associated with trading restrictions, exchange rates fluctuations and non-synchronous trading. In contrast to most of the previous studies, we apply time varying methodology for the analysis of both short-term and long-term comovements that provide detailed evidence on the pattern and dynamics of the equity market linkages. We find evidence in favour of increasing conditional correlations for all of the markets since 2001. Time-varying and recursive cointegration tests provide somewhat weak evidence in favour of the presence of bivariate cointegration relationships, but stronger evidence in the multivariate case, suggesting limited diversification opportunities for the U.S. based investor in the long run.