Volatility and Spillover Effects of Central and Eastern Europe: Impact of EU Enlargement

Document Type

Book Chapter




Faculty of Business and Law


School of Business




Golab, A. , Allen, D. E., Powell, R. , & Yap, G. (2014). Volatility and Spillover Effects of Central and Eastern Europe: Impact of EU Enlargement. In Arouri, M., Boubaker, S. & Nguyen, D. (Eds.). Emerging Markets and the Global Economy: A Handbook (pp. 449-482). Netherlands: Elsevier. Available here


The CEE stock markets have become of interest to many international financial researchers and policy-makers during the last decade. Former Eastern block economies became a source of investment attention to investors due to their better diversification opportunities. These markets have become more attractive and accessible for investors due to the unification of restrictions on transactions, a number of reforms in a European Union (EU) accession process,and an increase in financial transparency. Moreover,EU expansion creates a unique landscape for new financial investigation and analysis. It could be argued that the CEE economies forma unique emerging markets structure, which typically offers attractive risk adjusted returns for international investors. Besides, both theoretical models and practical concerns motivate researchers toward focusing on volatility spillovers between financial markets. An accurate characterization of volatility spillovers has direct implications for portfolio management and asset allocation. This chapter investigates a number of important aspects of portfolio selection and investment opportunities and their implications for CEE-based investors through modeling volatility spillovers and conditional correlations between more and less developed markets in periods before and after the date of the recent EU expansion. Specifically it deals with cross market relationships between the 12 emerging markets and does not attempt to include any developed markets. The results show growing investment potential in these emerging equity markets, with a lowering of average risk post-joining the EU. This provides good opportunities for European investors as well as important indications for economic stability, growth, and integration of these markets in the post-EU period.



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