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The Effect Of The Emu On Short And Long-Run Stock Market Dynamics: New Evidence On Financial Integration

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  • Juan A. Lafuente

    ()
    (Universitat Jaume I)

  • Javier Ordoñez

    (Universitat Jaume I)

Abstract

This paper deals with the time evolution of stock market integration around the introductionof the euro. In particular we test whether the degree of integration between the main eurozonecountries increased after European monetary union. The contribution of the paper to the extantliterature is twofold: a) first, we take into account the potential long-run equilibrium relationshipbetween stock indices allowing for structural changes in the cointegration space that might capturethe effect of the introduction of the euro, and b) we formally test the existence of greater financialintegration after European monetary union across the main member countries and between thesemembers and the UK. Empirical evidence reveal the existence of long-run equilibrium relationshipsbetween European stock markets even before the introduction of the euro. Our empirical findingssuggest that financial integration is not the direct consequence of the removal of exchange rate riskdue to currency unification. Rather, it arises as a result of macroeconomic convergence. This aspectis corroborated by the nature of the principal component structure of estimated conditionalcorrelations. Este trabajo analiza la evolución del grado de integración de los mercados bursátileseuropeos en torno a la introducción del euro. En particular se contrasta si el grado de integraciónentre los principales miembros de la Unión Europea y Monetaria se ha incrementado a partir de laintroducción del euro. La contribución del trabajo es doble: a) por un lado se tiene en cuenta laposible existencia de relaciones de cointegración entre los índices bursátiles, permitiendo laexistencia de cambios estructurales en el espacio de cointegración y b) se proporciona un contrasteformal para la hipótesis nula de mayor grado de integración después de la introducción de la monedacomún. La evidencia empírica revela la existencia de relaciones de equilibrio a largo plazo entre losmercados, incluso antes de la introducción del euro. Los resultados sugieren que la integraciónfinanciera no es el resultado de la adopción de la moneda común sino que es un proceso dinámicoque se ha visto fortalecido por la unificación de la moneda. Este aspecto es corroborado por lanaturaleza de la estructura de componentes principales que se obtiene a partir de la medida deintegración considerada.

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Bibliographic Info

Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie EC with number 2007-12.

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Length: 27 pages
Date of creation: Oct 2007
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasec:2007-12

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Keywords: cointegración; mercados financieros; Unión Europea y Monetaria; integración financiera dinámica cointegration; dynamic financial integration; stock markets; European Monetary Union.;

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  1. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2006. "How do trade and financial integration affect the relationship between growth and volatility?," Journal of International Economics, Elsevier, vol. 69(1), pages 176-202, June.
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  3. Imbs, Jean, 2006. "The real effects of financial integration," Journal of International Economics, Elsevier, vol. 68(2), pages 296-324, March.
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  5. Robert-Paul Berben & W. Jos Jansen, 2003. "Comovement in international equity markets: A sectoral view," Finance 0310001, EconWPA.
  6. Chelley-Steeley, Patricia L., 2005. "Modeling equity market integration using smooth transition analysis: A study of Eastern European stock markets," Journal of International Money and Finance, Elsevier, vol. 24(5), pages 818-831, September.
  7. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  8. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  9. 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.
  10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  11. Fujii, Eiji, 2005. "Intra and inter-regional causal linkages of emerging stock markets: evidence from Asia and Latin America in and out of crises," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(4), pages 315-342, October.
  12. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  13. Franses,Philip Hans & Dijk,Dick van, 2000. "Non-Linear Time Series Models in Empirical Finance," Cambridge Books, Cambridge University Press, number 9780521770415.
  14. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
  15. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
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