Comovements of financial markets in the EU countries

Abstract

This article examines comovements between stock and government bond markets in the EU countries. Previous authors mostly indicated significant highly volatile comovements between the markets. In addition, it was proven in several markets that in times of financial crisis the comovements between financial markets are becoming stronger and negative correlations appear indicating flight-to-quality from stocks to government bonds. Despite of that, there exists a tendency to analyze only financial markets of Eurozone countries leaving the rest of the EU members behind. The aim of this research was to fill this gap by providing insights of co-movements between stocks and government bond markets of al thel EU countries together with recommendations for portfolio diversification. The first stage of the research was implemented by using Pearson’s correlation coefficient. Logarithmic returns on 52 market indices were used for calculations of correlation coefficients in the period of 1993–2012. The second stage of the research included the estimation of correlations in the period of 2008–2013, commonly referred to as financial crisis. In addition, statistical significance of coefficients was evaluated by testing Fisher’s null hypothesis. The results of the research show that majority of correlation coefficients between stock and government bond indices were rather small and not significant during the full sample period with the exception in financial markets of Greece, Hungary, Lithuania and Romania (weak-medium statistically significant correlations). The results indicate financial markets in the countries mentioned being more related than in the rest of the EU countries, not being suitable for diversification between asset classes. [...]