Tallinn University of Technology

On 19 March 2021, Kersti Harkmann, PhD student at the TalTech Department of Economics and Finance, defended her PhD thesis “Essays on Volatility and Contagion in Financial Markets”. The thesis consists of three publications investigating volatility and comovements in financial markets:

Stock Market Contagion from Western Europe to Central and Eastern Europe during the Crisis Years 2008-2012 focuses on the short-term comovements in financial markets shown in stock market returns. The dynamic conditional correlation coefficients (DCCs) increase gradually between 2002 and 2012. The analyses also demonstrate that the DCCs increase extensively when there is high stress in the financial markets. The dynamic correlations between the indices increased noticeably during the Global Financial Crisis,
and the peaks in the DCCs coincide with the major shock events of the sovereign debt crisis.

Integration of the Baltic stock markets with developed European markets examines long-term comovements using the cointegration methodology of Johansen (1988, 1991). The study assesses the extent of long-term integration of the Baltic stock markets of Estonia, Latvia and Lithuania with financial markets in Western Europe and the USA. The empirical analysis over the period 2005-2015 reveals that the Baltic stock markets are integrated with the Swedish stock market, and that the transmission of shocks goes from Sweden to the Baltic States. There is no evidence of any long-term relationships between the Baltic markets and the euro area or the USA, which suggests the Baltic markets offer diversification benefits for some stock markets.

Optimal currency hedge and the carry trade investigates how the side effects of comovements and volatility in financial markets can be mitigated in portfolio management. The publication studies how a risk-minimising investor holding a portfolio of foreign currency bonds could respond to covariations of the underlying assets to preserve the value of the portfolio by hedging some of the currency exposure. The performance of different hedging strategies is compared and the results show that for a risk-minimising investor, the hedging is always more beneficial than leaving the currency exposure open. The optimal hedging is superior to full hedging of the currency exposure. Moreover, it can be observed that portfolios with optimal hedges imply carry trades.

Supervisor of the thesis: Professor Karsten Staehr (TalTech)

Opponents: Assistant Professor Anita Suurlaht (University College Dublin) and Professor Christopher Hartwell (Zürich University of Applied Sciences)

This work was supported by Estonian Target Financing Grant no. SF0140059s12 and Base Financing Grant no. B45/2015.

Full text of the thesis is available at the TalTech library: [link]

Kersti Harkmann's Phd Defence