Volatility spillovers in East European black-market exchange rates

This paper tests the efficiency of dollar exchange rate black-markets for the currencies of six formerly socialist countries of Eastern Europe, under conditions of imperfect information, high transaction costs and pronounced turbulence due to political and economic crisis and reform. We find evidence of volatility spillovers in conditional mean affecting only the markets for the Bulgarian lev and Rumanian lei, and limited evidence of volatility spillovers in conditional variance which imply the possibility Of some policy coordination emanating from the Soviet Union. Nevertheless, on balance our results lend broad support to the efficiency of exchange rate black-markets, and to previous results concerning floating exchange rate systems in general. (C) 2001 Elsevier Science Ltd. All rights reserved.