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A Co-integration Analysis Approach to European Union Integration: The Case of Acceding and Candidate Countries

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  • Onay, Ceylan
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    Abstract

    This paper examines the long-term financial integration of second-round acceding and candidate countries’ with the European Union and the US stock markets during the Accession Process. The lowpair wise correlations between these markets imply portfolio diversification opportunities, yet correlation is a short-term measure. The long-term stock market interdependence is analyzed with Johansen (1991) cointegration approach, which indicates no long-term relationship between the second-round countries and the EU and US stock markets. Yet Engle-Granger (1987) causality test presents evidence of a casual flow from European and US equity markets to Croatian stock market and from Turkish Stock market to Bulgarian stock market suggesting a short-term lead-lag relationship amongst. The results indicate that the completion of accession negotiations with Bulgaria and Romania and ongoing negotiations with Croatia and Turkey have not yet resulted in the complete financial integration of these markets with the European Union. They still offer significant long-term diversification opportunities for the European as well as the US investors.

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    Bibliographic Info

    Article provided by European Community Studies Association Austria (ECSA-A) in its journal European Integration online Papers (EIoP).

    Volume (Year): 10 (2006)
    Issue (Month): (09)
    Pages:

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    Handle: RePEc:erp:eiopxx:p0150

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    Related research

    Keywords: economic integration; financial markets; enlargement; globalization; international trade; EMU; liberalization; East-Central Europe; EU-East-Central Europe; Euro; economics;

    References

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    1. Michal Brzozowski, 2006. "Exchange Rate Variability and Foreign Direct Investment: Consequences of EMU Enlargement," Eastern European Economics, M.E. Sharpe, Inc., vol. 44(1), pages 5-24, February.
    2. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
    3. Campbell R. Harvey, 1994. "Predictable Risk and Returns in Emerging Markets," NBER Working Papers 4621, National Bureau of Economic Research, Inc.
    4. K. Rouwenhorst, 1998. "European Equity Markets and EMU: Are the Differences Between Countries Slowly Disappearing?," Yale School of Management Working Papers ysm103, Yale School of Management, revised 01 Aug 2000.
    5. Bessler, David A. & Yang, Jian, 2003. "The structure of interdependence in international stock markets," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 261-287, April.
    6. Haug, Alfred A. & MacKinnon, James G. & Michelis, Leo, 2000. "European Monetary Union: a cointegration analysis," Journal of International Money and Finance, Elsevier, vol. 19(3), pages 419-432, June.
    7. Phylaktis, Kate & Ravazzolo, Fabiola, 2005. "Stock market linkages in emerging markets: implications for international portfolio diversification," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(2), pages 91-106, April.
    8. Mateus, Tiago, 2004. "The risk and predictability of equity returns of the EU accession countries," Emerging Markets Review, Elsevier, vol. 5(2), pages 241-266, June.
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    Cited by:
    1. Kovačić, Zlatko, 2007. "Forecasting volatility: Evidence from the Macedonian stock exchange," MPRA Paper 5319, University Library of Munich, Germany.

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