Time-varying betas in Central and Eastern European markets: a bivariate BEKK GARCH approach

In this paper, we analyse country risk of eight Central and Eastern European (CEE) countries by calculating time-varying betas. We have used daily closing prices of indices from 3 June 2002 through 2 December 2011, resulting in 2021 observations. The time-varying betas where calculated by applying multivariate GARCH BEKK models under multivariate normal distribution of errors. Results indicate that BEKK models are appropriate on estimating time-varying beta for Czech Republic, Hungary, Estonia, Lithuania, Poland, Romania, and Russia, except for Latvia. Moreover, the behaviour of time-varying betas during the crisis differs between CEE markets. Countries with flat exchange rates seem to eliminate some of the country risk. For Romania and Hungary, time-varying beta increase was eliminated due to assistance of the International Monetary Fund during the crisis.