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The Euro and European Financial Market Integration

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Author Info

  • Söehnke Bartram

    (Lancaster University)

  • Stephen Taylor

    (Lancaster University)

  • Yaw-Huei Wang

    (Lancaster University)

Abstract

We use a time-varying copula model to investigate the impact of the introduction of the Euro on the dependence between seventeen European stock markets during the period 1994-2003. The model is implemented with a GJR-GARCH-t model for the marginal distributions and the Gaussian copula for the joint distribution, which allows capturing time-varying, non-linear relationships. The results show that within the euro area, market dependence increased after the introduction of the common currency only for large equity markets, such as in France, Germany, Italy, the Netherlands and Spain, while transaction costs remain important barriers to investment in and thus integration of smaller markets. Structural break tests indicate that the increase in financial market integration started around the beginning of 1998 when euro membership was determined and the relevant information was announced. We also estimate time-varying dependence measures for non-euro European countries with the euro-zone equity market. The UK and Sweden, but not other countries outside the euro area, are found to exhibit an increase in equity market co-movement, which is consistent with the interpretation that these countries may be expected to join the euro in the future.

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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2004 with number 49.

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Date of creation: 17 Sep 2004
Date of revision: 13 Oct 2004
Handle: RePEc:mmf:mmfc04:49

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

Related research

Keywords: Euro; financial markets; integration; copula; GARCH; international finance;

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References

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Citations

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Cited by:
  1. Christos Savva & Denise R Osborn & Len Gill, 2005. "Volatility, spillover Effects and Correlations in US and Major European Markets," Money Macro and Finance (MMF) Research Group Conference 2005 23, Money Macro and Finance Research Group.
  2. Dick van Dijk & Haris Munandar & Christian Hafner, 2011. "The euro introduction and noneuro currencies," Applied Financial Economics, Taylor & Francis Journals, vol. 21(1-2), pages 95-116.
  3. Lai, YiHao & Chen, Cathy W.S. & Gerlach, Richard, 2009. "Optimal dynamic hedging via copula-threshold-GARCH models," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(8), pages 2609-2624.
  4. Christos S. Savva & Denise R. Osborn & Len Gill, 2005. "Spillovers and Correlations between US and Major European Stock Markets: The Role of the Euro," The School of Economics Discussion Paper Series 0541, Economics, The University of Manchester.
  5. Barbara Berkel, 2006. "The EMU and German Cross-Border Portfolio Flows," MEA discussion paper series 06110, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  6. Ausin, M. Concepcion & Lopes, Hedibert F., 2010. "Time-varying joint distribution through copulas," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2383-2399, November.

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