The Impact of Global Economic Crisis on the Stock Markets: Comparison Between East Asian and Eastern European Countries

Abstract

This paper investigates the impact of global economic crisis on the stock markets of East Asian and Eastern European countries. Specifically, this paper analyzes stock markets of five countries in the Eastern European region (i.e., Russia, Poland, Czech, Hungary, and Bulgaria) and five East Asian countries (i.e., Korea, Japan, China, Hong Kong, and Taiwan) using their daily rate of returns on the market indices for the period from September 17, 2007 to March 12, 2010. Utilizing the technique of correlation analysis and extended GARCH (generalized autoregressive conditional heteroskedastic) model as the method of investigation, this paper try to investigate whether the global economic crisis has an impact on the linkages between the stock markets of East Asian and Eastern European countries and their dependence structure to the U.S. equity market. This paper finds that the global economic crisis has a significant impact on the stock market patterns of Eastern European and East Asian markets. However, Eastern European markets were more severely affected by the global financial crisis as compared with the East Asian markets. We observe that East Asian markets show higher correlation with the U.S. market as compared with Eastern European markets while the level of inter‐dependence across the markets within the region is not significantly different between Eastern European and East Asian countries. We also find that for the entire sample period the U.S. influence on the East Asian markets is more significant than that on the stock markets of Eastern European countries. This result confirms the association between the degree of dependence of equity markets and the economic linkages.