Integration of Central and Eastern European and the Euro-Area Financial Markets: Repercussions from the Global Financial Crisis

We examine integration of financial markets and banking sectors in Central and Eastern Europe and the euro area. We study co-movements between government bond and equity markets of Germany and those of Poland, Czech Republic, Hungary, as well as Slovenia and Slovakia (the two recent euro members). We assume that financial integration is essential for subsequent monetary convergence, as it will enable the euro candidates to mitigate systemic risk and avert potentially destabilizing shocks. Government bond yields of the Czech Republic and Poland show high correlation with German yields, in contrast to those of the remaining countries. Equity returns of Slovenia and Slovakia show no correlation with German returns, while those of the three euro candidates show high correlation. The banking sectors of the Czech Republic and Poland show higher integration with the euro area than do Slovakia and Slovenia, while Hungary, dominated by country-specific shocks, lags behind all the others.