Return equicorrelation and dynamic spillovers between Central and Eastern European, and World*1stock markets, 2010-2019.

Globalisation and financial development have significantly integrated stock markets worldwide. A higher degree of interrelatedness and integration provides firms with increased access to global capital markets and a reduced cost of equity. This study examines the evolution of the return and volatility spillover effects between the world stock index, and the Central and Eastern European (CEE) countries' (Croatia, the Czech Republic, Hungary, Poland, and Romania) stock markets using both the multivariate dynamic equicorrelation -- generalised autoregressive conditional heteroskedasticity (DECO-GARCH) model and the spillover index. The results indicate that the average return equicorrelation across the CEE and world stock indices is positive. This impairs the benefits of CEE and world portfolio diversification. In addition, bidirectional return and volatility between the world stock index's and CEE stock markets' returns exist in the aftermath of the recent European debt crisis. Importantly, the net volatility spillover bursts in either a negative or positive direction, and its sign changes over the study period. Finally, the author employ Clark--West's (2007) test of equal mean squared prediction error, and show that the world stock index can help predict the future returns and volatility of the CEE stock markets. These findings have significant implications for portfolio investors and policymakers interested in the CEE and world stock markets in predicting portfolio market risk exposures and determining the persistence of diversification benefits in these markets. [ABSTRACT FROM AUTHOR]