Prague Economic Papers 2015, 24(6):678-698 | DOI: 10.18267/j.pep.530

The Euro Crisis and Contagion among Central and Eastern European Currencies: Recommendations for Avoiding Lending in a Safe Haven Currency such as CHF

Gábor Dávid Kiss, Tamás Schuszter
University of Szeged, Faculty of Economics and Business Administration, Institute of Finance and International Economic Relations, Szeged, Hungary (kiss.gabor.david@eco.u-szeged.hu).

This study analyses the Czech, Hungarian, and Polish currencies by examining the statistical characteristics of the Swiss franc as well as the ECB monetary policy in order to indicate shocks in these markets between 2002 and 2013. The abundance of monetary easing decisions can be used as a viable sign of market misbehaviour in addition to the low probability of extreme exchange rate fluctuations. Indeed, the temporal distribution of extreme currency fluctuations provides vital information about the nature of the recent crisis. Contagions can be defined as increased correlations during periods of crisis, while divergence means a significant decrease in this regard. Methodologically, common movements in this study were calculated by using DCC-GARCH modelling. The findings of this study underline the special features of the Swiss franc exchange rate, notably that its extreme fluctuations can be managed by using swap agreements and that it tended towards divergences during the crisis era. These results support the idea of avoiding lending in reserve currencies.

Keywords: extreme interval, DCC-GARCH, currency market, contagion, CEE
JEL classification: C32, E44, E58, G01, G15

Published: January 1, 2015  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Kiss, G.D., & Schuszter, T. (2015). The Euro Crisis and Contagion among Central and Eastern European Currencies: Recommendations for Avoiding Lending in a Safe Haven Currency such as CHF. Prague Economic Papers24(6), 678-698. doi: 10.18267/j.pep.530
Download citation

References

  1. Ács, A. (2011), "A likviditás dimenziói. Dimensions of Liquidity" Hitelintézeti Szemle, Vol. 10, No. 3, pp. 241-261.
  2. Antal, J., Gereben, Á. (2011), "Foreign Reserve Strategies for Emerging Economies - before and after the Crisis." MNB Bulletin, Vol. 6, No. 1, pp. 7-19.
  3. Arrow, K. J. (1986), "Rationality of Self and Others in an Economic System." Journal of Business, Vol. 59, No. 4, pp. 386-399, http://dx.doi.org/10.1086/296376 Go to original source...
  4. Árvai, Zs., Driessen, K., Ötker-Robe, İ. (2009), "Regional Financial Interlinkages and Financial Contagion within Europe." IMF Working Paper 2009-6. Go to original source...
  5. Babetskaia-Kukharchuk, O., Babetskii, I., Podpiera, J. (2008), "Convergence in Exchange Rates: Market's View on CE-4 Joining EMU." Applied Economics Letters, Vol. 15, No. 5, pp. 385-390. Go to original source...
  6. Barabási, A. L., Albert, R. (1999), "Emergence of Scaling in Random Networks." Science, Vol. 286, No. 5439, pp. 509-512. Go to original source...
  7. Bearce, D. H. (2002a), Monetary Divergence: Domestic Policy Autonomy in the Post-Bretton Woods Era. Ann Arbor: University of Michigan Press. Go to original source...
  8. Bearce, D. H. (2002b), "Monetary Divergence Domestic Political Institutions and the Monetary Autonomy - Exchange Rate Stability Trade-Off." Comparative Political Studies, Vol. 35, No. 2, pp. 194-220. Go to original source...
  9. Bekaert, G., Harvey, C. R., Ng, A. (2005), "Market Integration and Contagion." Journal of Business, Vol. 78, No. 1, pp. 39-69, http://dx.doi.org/10.1086/426519 Go to original source...
  10. Benedek, G., Lublóy, Á., Szenes, M. (2007), "A hálózatelmélet banki alkalmazása. Network Theory: an Application for Banking" Közgazdasági Szemle, Vol. 54, No. 7-8, pp. 682-702.
  11. BIS (2011), "Global Liquidity - Concept, Measurement and Policy Implications." BIS CGFS Publications 2011-45.
  12. Bonanno, G., Lillo, F., Mantegna, R. (2001), "Levels of Complexity in Financial Markets." Physica A, Vol. 299, No. 1-2, pp. 16-27. Go to original source...
  13. Borio, C. (2014), "Monetary Policy and Financial Stability: What Role in Prevention and Recovery?" BIS Working Papers No. 440. Go to original source...
  14. Bubák, V., Kočenda, E., Zikes, F. (2011), "Volatility Transmission in Emerging European Foreign Exchange Markets." Journal of Banking & Finance, Vol. 35, No. 11, pp. 2829-2841, http://dx.doi.org/10.1016/j.jbankfin.2011.03.012 Go to original source...
  15. Campbell, R., Koedij, K., Kofman, P. (2002), "Increased Correlation in Bear Markets." Financial Analysts Journal, Vol. 58, No. 1, pp. 87-94. Go to original source...
  16. Cappeiello, L., Engle, R. F., Sheppard, K. (2006), "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns." Journal of Financial Econometrics, Vol. 4, No. 4, pp. 537-572. Go to original source...
  17. Clauset, A., Shalizi, C. R., Newman, M. E. J. (2009), "Power-Law Distributions in Empirical Data." SIAM Review, Vol. 51, No. 4, pp. 661-703. Go to original source...
  18. Darvas, Zs. (2013), "The Euro Crisis: Ten Roots but Fewer Solutions," in Farkas, B., ed., The Aftermath of the Global Crisis in the European Union. Newcastle upon Tyne: Cambridge Scholars Publishing, pp. 83-104.
  19. Deutsch, H-P. (2002), Derivatives and Internal Models. Houndmills: Palgrave Macmillan.
  20. Dietrich, D., Knedlik, T., Lindner, A. (2011), "Central and Eastern European Countries in the Global Financial Crisis: A Typical Twin Crisis?" Post-Communist Economies Vol. 23, No. 4, pp. 415-432. Go to original source...
  21. Ding, Z., Granger, C. W. J., Engle, R. F. (1993), "A Long Memory Property of Stock Market Returns and a New Model." Journal of Empirical Finance, Vol. 1, No. 1, pp. 83-106. Go to original source...
  22. EBF (2012), The New EBF Banking Sector Statistics Database 2012. Brussels: European Banking Federation.
  23. ECB (2002-2012), Annual Report. Frankfurt am Main: European Central Bank.
  24. ECB (2011), The Monetary Policy of the ECB. Frankfurt am Main: European Central Bank.
  25. Engle, R. F. (2002), "Dynamic Conditional Correlation - A Simple Class of Multivariate GARCH Models." Journal of Business and Economic Statistics, Vol. 20, No. 3, pp. 377-389. Go to original source...
  26. Erdős, P., Rényi, A. (1960), "On the Evolution of Random Graphs." Publications of the Mathematical Institute of the Hungarian Academy of Sciences, Vol. 5, No. 1, pp. 17-61.
  27. Fama, E. F. (1970), "Efficient Capital Markets: A Review of Theory and Empirical Work." Journal of Finance, Vol. 25, No. 2, pp. 383-417, http://dx.doi.org/10.2307/2325486 Go to original source...
  28. Farkas, B. (2011), "The Central and Eastern European Model of Capitalism." Post-Communist Economies, Vol. 23, No. 1, pp. 15-34. Go to original source...
  29. Forbes, J. K., Rigobon, R. (2002), "No Contagion, only Interdependence: Measuring Stock Market Comovements." Journal of Finance, Vol. 57, No. 5, pp. 2223-2261, http://dx.doi.org/10.1111/0022-1082.00494 Go to original source...
  30. Gabaix, X., Gopikrishnan, P., Plerou, V., Stanley H. E. (2003), "A Theory of Power-Law Distributions in Financial Market Fluctuations." Nature, Vol. 423, No. 6937, pp. 267-270. Go to original source...
  31. Goldstein, M., Turner, P. (2004), Controlling Currency Mismatches in Emerging Markets. Washington, DC: Viva Books.
  32. Gyöngyösi, Zs. (2010), "A törlesztési késedelembe eső lakossági jelzáloghitelek jellemzői a Központi Hitelinformációs Rendszer adatai alapján." Költségvetési Felelősség Intézet Budapest Munkaanyag No. 2010-1.
  33. Haile, F., Pozo, S. (2008), "Currency Crisis Contagion and the Identification of Transmission Channels." International Review of Economics and Finance, Vol. 17, pp. 572-588. Go to original source...
  34. Jentsch, V., Kantz, H., Albeverio, S. (2006), "Extreme Events: Magic, Mysteries and Challenges," in Albeverio, S., Jentsch, V., Kantz, H., eds., Extreme Events in Nature and Society. Heidelberg: Springer, pp. 1-18. Go to original source...
  35. Jiawei, H., Micheline, K. (2004), Data Mining Concepts and Techniques. Amsterdam: Elsevier.
  36. Kantz, H., Altman, E. G., Hallerberg, S., Holstein, D., Riegert, A. (2006), "Dynamical Interpretation of Extreme Events: Predictability and Predictions," in Albeverio, S., Jentsch, V., Kantz, H., eds., Extreme Events in Nature and Society. Heidelberg: Springer, pp. 69-93. Go to original source...
  37. Kaminsky, G. L., Reinhart, C. M. (1999), "The Twin Crises: The Causes of Banking and Balance of Payments Problems." American Economic Review, Vol. 89, pp. 473-500. Go to original source...
  38. Kiss, G. D., Kosztopulosz, A. (2012), "The Impact of the Crisis on the Monetary Autonomy of Central and Eastern European Countries." Public Finance Quarterly, Vol. 57, No. 1, pp. 27-51.
  39. Kiss, G. D., Kosztopulosz, A. (2013), "The Adequacy of Inflation-Targeting Monetary Policy and Euro Zone Participation for the Central-East European Countries," in Farkas, B., ed., The Aftermath of the Global Crisis in the European Union. Newcastle upon Tyne: Cambridge Scholars Publishing, pp. 178-210.
  40. Kovács, Gy. (2009), "Financial Stability and the Banking System, or the Imbalance of the Intermediary System." Public Finance Quarterly, Vol. 54, No. 1, pp. 49-67.
  41. Kuper, G. H., Lestano, L. (2007), "Dynamic Conditional Correlation Analysis of Financial Market Interdependence: An Application to Thailand and Indonesia." Journal of Asian Economics, Vol. 18, pp. 670-684. Go to original source...
  42. Kuusk, A., Paas, T. (2013), "A Meta-Analysis-Based Approach for Examining Financial Contagion with Special Emphasis on CEE Economies." Eastern European Economics, Vol. 51, No. 3, pp. 71-90. Go to original source...
  43. Lawson, C., Zimková, E. (2009), "The Credit Crisis: What Lessons for Visegrad?" Prague Economic Papers, Vol. 18, No. 2, pp. 99-113, http://dx.doi.org/10.18267/j.pep.344 Go to original source...
  44. MNB (2013), "Az MNB pénzügyi felügyeleti funkciójának megerősítése - új szabályozói eszközök MNB-hez rendelése és a PSZÁF MNB-be integrálása." Magyar Nemzeti Bank Budapest Vitaanyag No. 2013-1.
  45. Muller, A., Verschoor, W. (2009), "The Effect of Exchange Rate Variability on US Shareholder Wealth." Journal of Banking and Finance, Vol. 33, No. 11, pp. 1963-1972. Go to original source...
  46. Pelle, A. (2006), "Opportunities in the Hungarian Financial Services Sector as Part of the Single European Market of Financial Services." Transition Studies Review, Vol. 13, No. 3, pp. 497-510. Go to original source...
  47. Plümper, T., Troeger, V. E. (2008), "Fear of Floating and the External Effects of Currency Unions." American Journal of Political Science, Vol. 32, No. 3, pp. 656-676. Go to original source...
  48. Simon, H. A. (1955), "A Behavioral Model of Rational Choice." The Quarterly Journal of Economics, Vol. 69, No. 1, pp. 99-118. Go to original source...
  49. Stavárek, D. (2009), "Assessment of the Exchange Rate Convergence in Euro-Candidate Countries." Amfiteatru Economic Journal, Vol. 11, No. 25, pp. 159-180.
  50. Stavárek, D. (2010), "Exchange Rate Volatility and the Asymmetric Fluctuation Band on the Way to the Eurozone." Applied Economics Letters, Vol. 17, No. 1, pp. 81-86. Go to original source...
  51. Van Horen, N., Jager, H., Klaassen, F. (2006), "Foreign Exchange Market Contagion in the Asian Crisis: a Regression-Based Approach." Review of World Economics, Vol. 142, pp. 374-401,, http://dx.doi.org/10.1007/s10290-006-0072-x Go to original source...
  52. Váradi, K. (2012), "Volt-e likviditási válság? A volatilitás és likviditás kapcsolatának vizsgálata. Was There a Liquidity Crisis? - Analysis of the Relationship between Volatility and Liquidity." Hitelintézeti Szemle, Vol. 11, No. 5, pp. 69-78.
  53. Vitali, S., Glattfelder, J. B., Battiston, S. (2011), "The Network of Global Corporate Control." PLoS ONE, Vol. 6, No. 10, pp. 25995. Go to original source...
  54. Vriend, N. J. (1996), "Rational Behavior and Economic Theory." Journal of Economic Behavior & Organization, Vol. 29, No. 2, pp. 263-285. Go to original source...
  55. Watts, D. J., Strogatz, S. H. (1998), "Collective Dynamics of 'Small-world' Networks." Nature, Vol. 393, No. 6638, pp. 440-442. Go to original source...
  56. Yesin, P. (2013), "Foreign Currency Loans and Systemic Risk in Europe." Federal Reserve Bank of St. Louis Review, Vol. 95, No. 3, pp. 219-235. Go to original source...

This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.