Similarities between Stock Market Reactions During the 2007 Financial Crisis and the 2020-2021 Coronavirus Pandemic. Correlation and Cointegration Analyses

In light of two recent global economic shocks, the global financial crisis of 2007/08 and the COVID-19 pandemic, this paper analyzes the relationships between global shocks and the national stock markets, looking to trends in volatility for the leading stock indices in six CEE countries, namely Austria, Bulgaria, Czech Republic, Hungary, Poland, and Romania, and indices from Germany (DAX) and the United States (S&P 500). The selected indices include the largest domestic companies in each country and make up most of the domestic market capitalization. For the analysis we used Garman-Klass (GK) volatility estimator, as the volatility was considered the most important proxy for market uncertainty. Then we used a simple correlation matrix to show initial tendencies. Also, the Johansen's test was used to determine if the indices are cointegrated and if this relationship has changed significantly in the non-crisis periods. We analyze Granger causality and the network approach as proposed by Diebold and Yilmaz (2015). The GK volatility results were individualized in three periods: 2007-2011 as a proxy for the global financial crisis and European sovereign debt; 2012-2019 representing a period of economic recovery and ultimately 2020-2021 representing the data points for the COVID-19 global pandemic. We find that particularly during periods of global distress, correlations between patterns of volatility for the stock market indices from these countries increase, and they exhibit stronger patterns of cointegration. These findings highlight the increasing connectivity in global financial markets and added challenges in crafting portfolio diversification strategies based on geography of stock holdings.