Determinants of European Stock Market Integration
MAGKS Working Paper No. 32-2009
10 Pages Posted: 25 Jul 2009
There are 2 versions of this paper
Determinants of European Stock Market Integration
Determinants of European Stock Market Integration
Date Written: July 20, 2009
Abstract
We analyse the determinants of stock market integration among EU member states for the period 1999–2007. First, we apply bivariate DCC-MGARCH models to extract dynamic conditional correlations between European stock markets, which are then explained by interest rate spreads, exchange rate risk, market capitalisation, and business cycle synchronisation in a pooled OLS model. By grouping the countries into euro area countries, 'old' EU member states outside the euro area, and new EU member states, we also evaluate the impact of euro introduction and the European unification process on stock market integration. We find a significant trend toward more stock market integration, which is enhanced by the size of relative and absolute market capitalisation and hindered by foreign exchange risk between old member states and the euro area. Interest rate spreads and business cycle synchronisation do not appear to play an important role in explaining equity market integration.
Keywords: stock market integration, European unification, DCC-MGARCH model
JEL Classification: E44, F3, F36, G15
Suggested Citation: Suggested Citation
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