The effect of the EMU on short and long-run stock market dynamics: new evidence on financial integration
AbstractThis paper deals with the time evolution of stock market integration around the introduction of the euro. In particular we test whether the degree of integration between the main eurozone countries increased after European monetary union. The contribution of the paper to the extant literature is twofold: a) first, we take into account the potential long-run equilibrium relationship between stock indices allowing for structural changes in the cointegration space that might capture the effect of the introduction of the euro; b) we formally test the existence of greater financial integration after European monetary union across the main member countries and between these members and the UK. Empirical evidence reveal the existence of long-run equilibrium relationships between European stock markets even before the introduction of the euro. Our empirical findings suggest that financial integration is not the direct consequence of the removal of exchange rate risk due to currency unification. Rather, it arises as a result of macroeconomic convergence. This aspect is corroborated by the nature of the principal component structure of estimated conditional correlations.
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Bibliographic InfoArticle provided by Inderscience Enterprises Ltd in its journal Int. J. of Financial Markets and Derivatives.
Volume (Year): 1 (2009)
Issue (Month): 1 ()
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Web page: http://www.inderscience.com/browse/index.php?journalID==307
cointegration; dynamic financial integration; stock markets; European monetary union; EMU; stock market dynamics; structural change; euro introduction; equilibrium relationships; macroeconomic convergence.;
Other versions of this item:
- Juan A. Lafuente & Javier Ordoñez, 2007. "The Effect Of The Emu On Short And Long-Run Stock Market Dynamics: New Evidence On Financial Integration," Working Papers. Serie EC 2007-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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