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Determinants of European stock market integration

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  • Büttner, David
  • Hayo, Bernd

Abstract

We analyse the determinants of stock market integration among EU member states for the period 1999–2007. First, we apply bivariate DCC-MGARCH models to extract dynamic conditional correlations between European stock markets, which are then explained by interest rate spreads, exchange rate risk, market capitalisation, and business cycle synchronisation in a pooled OLS model. By grouping the countries into euro area countries, “old” EU member states outside the euro area, and new EU member states, we also evaluate the impact of euro introduction and the European unification process on stock market integration. We find a significant trend toward more stock market integration, which is enhanced by the size of relative and absolute market capitalisation and hindered by foreign exchange risk between old member states and the euro area. Interest rate spreads and business cycle synchronisation are also significant factors in explaining equity market integration.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 35 (2011)
Issue (Month): 4 ()
Pages: 574-585

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Handle: RePEc:eee:ecosys:v:35:y:2011:i:4:p:574-585

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Keywords: Stock market integration; European unification; DCC-MGARCH model;

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References

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  1. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  2. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
  3. Leamer, Edward E., 1983. "Model choice and specification analysis," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 5, pages 285-330 Elsevier.
  4. Fratzscher, M., 2001. "Financial Market Integration in Europe: On the Effects of EMU on Stock Markets," Papers 48, Quebec a Montreal - Recherche en gestion.
  5. Kim, Suk Joong & Moshirian, Fariborz & Wu, Eliza, 2005. "Dynamic stock market integration driven by the European Monetary Union: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2475-2502, October.
  6. Athanasios Orphanides & Simon van Norden, 2001. "The Unreliability of Output Gap Estimates in Real Time," CIRANO Working Papers 2001s-57, CIRANO.
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Citations

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Cited by:
  1. David Büttner & Bernd Hayo & Matthias Neuenkirch, 2012. "The impact of foreign macroeconomic news on financial markets in the Czech Republic, Hungary, and Poland," Empirica, Springer, vol. 39(1), pages 19-44, February.
  2. Baumöhl, Eduard, 2013. "Stock market integration between the CEE-4 and the G7 markets: Asymmetric DCC and smooth transition approach," MPRA Paper 43834, University Library of Munich, Germany.
  3. R. Khalfaoui & M. Boutahar, 2012. "Portfolio Risk Evaluation: An Approach Based on Dynamic Conditional Correlations Models and Wavelet Multi-Resolution Analysis," Working Papers halshs-00793068, HAL.
  4. Ekaterina Dorodnykh, 2013. "What Drives Stock Exchange Integration?," International Journal of Economic Sciences and Applied Research (IJESAR), Technological Educational Institute (TEI) of Kavala, Greece, vol. 6(2), pages 47-79, September.
  5. Pirovano, Mara, 2012. "Monetary policy and stock prices in small open economies: Empirical evidence for the new EU member states," Economic Systems, Elsevier, vol. 36(3), pages 372-390.
  6. Urbański, Stanisław, 2012. "Multifactor explanations of returns on the Warsaw Stock Exchange in light of the ICAPM," Economic Systems, Elsevier, vol. 36(4), pages 552-570.
  7. Kannan Thuraisamy, . "Intra-market Sovereign Linkages of Latin American International Bonds," Financial Econometics Series 2013_04, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  8. Gębka, Bartosz & Karoglou, Michail, 2013. "Have the GIPSI settled down? Breaks and multivariate stochastic volatility models for, and not against, the European financial integration," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3639-3653.
  9. Samitas, Aristeidis & Tsakalos, Ioannis, 2013. "How can a small country affect the European economy? The Greek contagion phenomenon," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 18-32.
  10. Baumohl, Eduard & Lyocsa, Stefan, 2013. "Volatility and dynamic conditional correlations of European emerging stock markets," MPRA Paper 49898, University Library of Munich, Germany.

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