Assessing Time-Varying Stock Market Integration in EMU for Normal and Crisis Periods

Sehgal, Sanjay and Gupta, Priyanshi and Deisting, Florent (2014): Assessing Time-Varying Stock Market Integration in EMU for Normal and Crisis Periods.

Abstract

In this paper, we examine the financial integration process amongst 17 EMU countries from January 2002 to June 2013 over a normal period as well as for the Global Financial Crisis (GFC) and Eurozone Debt Crisis (EDC) periods. We classify the economies in three groups (A, B and C) based on their GDP to examine whether the economic size influences financial integration. Seven indicators are used for the purpose, namely, Beta Convergence, Sigma Convergence, Variance Ratio, Asymmetric DCC, Dynamic Cointegration, Market Synchronisation Measure and Common Components Approach. The results suggest that large sized EMU economies (termed as Group A) exhibit strong financial integration. Moderate financial integration is observed for middle-sized EMU economies with old membership (termed as Group B). Small sized economies (termed as Group C) economies seemed to be least integrated within the EMU stock market system. The findings further suggest presence of contagion effects as one moves from normal to crisis periods, which are specifically stronger for more integrated economies of Group A. We recommend institutional, regulatory and other policy reforms for Group B and especially Group C to achieve higher level of integration.

• Item Type: MPRA Paper
• Language: English
• Keywords: EMU, Global Financial crisis, Eurozone Debt Crisis, Stock Market integration, Time-varying financial integration, Beta Convergence, Sigma Convergence, Variance Ratio, Asymmetric DCC, Rolling Cointegration, Carhart four factor model, Markov Regime Switching Model
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Afxentiou, P. C. (2000). Convergence, the Maastricht Criteria and Their Benefits. The Brown Journal of World Affairs 7(1) , 245-254.

Ahmad, W., S. Sehgal, and N. Bhanumurthy (2013b). Eurozone Crisis and BRIICKS stock markets , Contagion or market interdependence?. Economic Modelling 33 , 209–225.

Ahmad, W., and S. Sehgal (2014. Regime dependent dynamics and European stock markets , Is asset allocation really possible?. Empirica.

Andrade, S. C., and V. Chhaochharia (2012). The Euro and European Equity Market Disintegration. Working paper, University of Miami.

Angelini, Paolo, A. Nobili, and C. Picillo (2011). The Interbank Market after August 2007 , What Has Changed, and Why?. Journal of Money, Credit and Banking 43(5) , 923-958.

Baele, L., A. Ferrando, P. Hordahl, E. Krylova, and C. Monnet (2004). Measuring Financial Integration in the Euro Area. ECB Occassional Paper 14.

Barro, Robert J., and X. Sala-i-Martin. (1992). Convergence. Journal of Political Economy 100 (2) , 223-251.

Bartram, S. M. and G. Dufey (2001). International Portfolio Investment , Theory, Evidence, and Institutional Framework. Financial Markets, Institutions and Instruments 10 (3) , 85-155.

Bartram, S. M., S. J. Taylor, and Y.-H. Wang (2007). The Euro and European Financial Market Dependence. Journal of Banking and Finance 31(5) , 1461–1481.

Baumohl, Eduard (2013). Stock market integration between the CEE-4 and the G7 markets , Asymmetric DCC and smooth transition approach. MPRA Paper No. 43834.

Battistini, N., M. Pagano, und S. Simonelli. (2013). Systemic risk and home bias in the euro area. European Commission Economic Papers 494.

Beirne, J., and M. Fratzscher (2012). The pricing of sovereign risk and contagion during the European sovereign debt crisis. Journal of International Money and Finance , 34, 60–82.

Bekaert, G., C. R. Harvey, C. T. Lundblad, and S. Siegel (2013). The European Union, the Euro, and Equity Market Integration. Journal of Financial Economics 109 (3) , 583–603.

Bley, Jorg. (2009). European Stock Market Integration , Fact or Fiction?, Journal of International Financial Markets, Institutions and Money, 19 , 759–776.

Boubakri, S. (2012). Assessing the financial integration of Central and Eastern European countries with the euro area , Evidence from panel data cointegration tests. International Economics , 131, 105-120.

Brock, W. A., D. A. Hsieh, and, B. LeBaron (1992). Nonlinear dynamics, chaos, and instability , Statistical theory and economic evidence. Cambridge, MA , MIT Press.

Brock, W. A., W. D. Dechert, B. LeBaron, and J. A. Scheinkman (1996). A test for independence based on the correlation dimension. Econometric Reviews, 15 , 197–235

Carhart, Mark M. (1997). On Persistence in Mutual Fund Performance. Journal of Finance 52(1) , 57–82. doi ,10.2307/2329556

Cappiello, L., R. H. Engle, and K. Sheppard (2006). Asymmetric dynamics in the correlations of global equity and bond returns. Journal of Financial Econometrics, 44 , 537-72.

Castro, V (2013). Macroeconomic determinants of the credit risk in the banking system , The case of the GIPSI. Economic Modelling 31, 672-683.

Cecchetti, S. G. (2009). Crisis and Responses , The Federal Reserve in the Early Stages of the Financial Crisis. Journal of Economic Perspectives 23 (1) , 51–75.

Claessens, S., G. Dell’Ariccia, D. Igan, and L. Laeven (2010). Cross-Country Experience and Policy Implications from the Global Financial Crisis. Economic Policy 25 (62) , 269–93.

Collins, D., and N. Biekpe (2003). Contagion and Interdependence in African Stock Markets. The South African Journal of Economics, 71 (1) , 181-194.

Fratzscher, M., (2002). Financial market integration in Europe , On the effects of the EMU on stock markets. International Journal of Finance and Economics, 7 (3) , 165–193.

Forbes, K., R. Rigobon (2002). No contagion, only interdependence , measuring stock market co-movements. Journal of Finance, 57 (5) , 2223–2262

Fung, L. K.P, C.S. Tam, and I.W. Yu (2008). Assessing the integration of Asia’s equity and bond markets. BIS paper 12, Bank for International Settlements.

Hamilton J. D. (1989). A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica, 57 (2) , 357-384.

Hardouvelis, G., D. Malliaropulos, R. Priestley (2006). EMU and European stock market integration. Journal of Business, 79 (1) , 365-392

Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59 (6) , 1551–1580.

Kelemen, R. D., J. Slapin, and A. Menon (2011). Wider and Deeper? Enlargement and Integration in the European Union. APSA 2011 Annual Meeting Paper .

Kim, S. J., F. Moshirian, and E. Wu (2005). Dynamic stock market integration driven by the European Monetary Union , An empirical analysis. Journal of Banking and Finance 29 (10) , 2475–2502.

Kuper, G. H., and Lestano. (2007). Dynamic conditional correlation analysis of financial market interdependence , An application to Thailand and Indonesia. Journal of Asian Economics 18 (4) , 670-684.

Majone, G.(2012).Rethinking European Integration after the debt crisis. Working Paper 3, The European Institute.

Maheu, J., T. McCurdy, and Y. Song, (2010). Components of bull and bear markets , bull corrections and bear rallies. Working Paper, University of Toronto.

Miloudi, A. (2003). Interdépendances entre Places Financières Européennes , une Analyse en terme de Cointégration et de Causalité. document de recherche, ATER en Finance, Université de Rennes.

Mylonidis, N., and C. Kollias (2010). Dynamic European stock market convergence , Evidence from rolling cointegration analysis in the first euro-decade. Journal of Banking and Finance 34 , 2056–2064.

Nelson, D.B. (1991). Conditional Heteroskedasticity in Asset Returns , A New Approach. Econometrica 59 (2) , 347-370.

OECD. (2005). Economic Survey of Greece 2005. OECD Economics Department.

Pagano, M. (1993). Financial markets and growth , An overview. European Economic Review 37 , 613–622. Panagiotidis, T. (2002). Testing the assumption of Linearity. Economics Bulletin 3 (29) , 1-9.

Perron, P. (1997). Further Evidence on Breaking Trend Functions in Macroeconomic Variables. Journal of Econometrics 80 , 355-385.

Philippas, D., and C. Siriopoulos (2013). Putting the C into crisis , Contagion, correlations and copulas on EMU bond markets. Journal of International Financial Markets, Institutions and Money 27 , 161-176.

Samitas, A., and I. Tsakalos (2013). How can a small country affect the European economy? The Greek contagion phenomenon. Journal of International Financial Markets, Institutions and Money 25 , 18–32.

Serletis, A., M. King (1997). Common stochastic trends and convergence of European Union stock markets. The Manchester School 65(1) , 44–57.

Taylor, M. P., and I. Tonks (1989). The Internationalisation of the Stock Markets and the Abolotion of U.K. Exchange Control. The Review of Economics and Statistics, 71(2) , 332-336.

Trichet, J.-C. (2010). State of the Union , The Financial Crisis and the ECB's Response between 2007 and 2009. Journal of Common Market Studies , 48(1), 7–19.