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McGill University and CIRANO; and Research Department, International Monetary Fund, respectively. The authors wish to thank Hyunchul Chung for research assistance and Tamim Bayoumi, Robert Corker, Mark De Broeck, and Paolo Mauro for comments.
Filer and Hanousek (1997, 1999) and Rockinger and Urga (1997). There is also a strand of literature discussing contagion effects between the capital markets in Eastern Europe: Gelos and Sahay (2000), Linne (1999), and Morck, Yeung, and Yu (1999).
The US dollar is used because it in general is the main currency used for trade but, as discussed below, redoing the analysis using a synthetic Euro exchange rate does not change the results.
The unit root hypothesis is tested using an augmented Dickey-Fuller test with a constant term and one lag. See Table 1 for the test values (column 4) and their p-values (column 5).
The mean is E[SZ] = +1*2pq + 0*(1-4pq)−1*2pq = 0, and the variance is E[SZ2] − E2[SZ] = (+1)2*2pq + (0)2*(l-4pq)+(−1)2*2pq − 0 = 4pq.