The effects of monetary policy response to the Covid-19 crisis on dynamic connectedness across financial markets in Central and Eastern Europe

Abstract

This study investigates the effects of monetary policy interventions in Central and Eastern European (CEE) economies on shifts in financial market linkages during the Covid-19-induced crisis. We explore the market reaction to both standard and non-standard (e.g., quantitative easing) monetary policy announcements by central banks in Czechia, Hungary, Poland, and Romania, and analyse the way they affected sovereign bond and stock market linkages. The analysis is further extended to include international spill-over effects. Research Design & Methods: We first quantify a set of time-varying asset correlations using asymmetric generalised DCC-GARCH models and daily data on financial asset returns. Going beyond the domestic stock-bond interdependencies, we explore cross-border connectedness between CEE economies, Germany, and the US. Next, we investigate the effects of detailed central bank announcements, as they unfolded during the Covid-19 crisis.