From Russia with Volatility: War-induced Spillovers to CEE Stock Markets

Abstract

This study investigates the volatility spillover dynamics between the Russian stock market and selected Central and Eastern European (CEE) markets in the context of the Russia-Ukraine war. The directional volatility transmissions from the IMOEX index, representing Russia, to the stock markets of Poland (WIG20), Czechia (PX), Hungary (BUX), Romania (BET), and Croatia (CROBEX) have been analyzed using daily closing price data obtained from Investing.com over the pre-war (February 24, 2016-February 24, 2019) and post-war (February 24, 2022-February 24, 2025) periods by employing the bivariate Full BEKK-GARCH model. By explicitly distinguishing between short-run shock effects and long-run volatility persistence, the study provides evidence on how geopolitical conflicts reshape regional risk transmission structures. The findings reveal a marked increase in volatility interactions following the outbreak of the war, particularly showing significant negative volatility spillovers from Russia to most CEE markets, indicating decoupling and defensive market behavior. As a robustness check, residual-based Granger causality tests derived from diagonal BEKK models support the core findings. The results demonstrate that geopolitical conflicts lead to structural changes in regional market linkages and highlight the need for stronger portfolio diversification strategies by investors and enhanced cross-border financial risk monitoring by policymakers during periods of war.