Abstract

http://ssrn.com/abstract=673641
 
 

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The Euro and European Financial Market Dependence


Söhnke M. Bartram


Warwick Business School - Department of Finance

Stephen J. Taylor


Lancaster University - Department of Accounting and Finance

Yaw-Huei Wang


National Taiwan University

June 17, 2005

AFA 2007 Chicago Meetings Paper

Abstract:     
We use, for the first time, 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 and offers significant advantages over other econometric techniques in analyzing the co-movement of financial time-series. 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 stronger co-movement of smaller markets. Structural break tests indicate that the increase in financial market dependence 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.

Number of Pages in PDF File: 50

Keywords: Euro, financial markets, dependence, co-movement, copula, GARCH, international finance, integration

JEL Classification: F3, F4, G1

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Date posted: July 2, 2005  

Suggested Citation

Bartram, Söhnke M. and Taylor, Stephen J. and Wang, Yaw-Huei, The Euro and European Financial Market Dependence (June 17, 2005). AFA 2007 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=673641 or http://dx.doi.org/10.2139/ssrn.673641

Contact Information

Söhnke M. Bartram
Warwick Business School - Department of Finance ( email )
Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)
HOME PAGE: http://go.warwick.ac.uk/sbartram/
Stephen J. Taylor (Contact Author)
Lancaster University - Department of Accounting and Finance ( email )
The Management School
Lancaster LA1 4YX
United Kingdom
+ 44 15 24 59 36 24 (Phone)
+ 44 15 24 84 73 21 (Fax)
HOME PAGE: http://www.lancs.ac.uk/staff/afasjt
Yaw-Huei Wang
National Taiwan University ( email )
Department and Graduate Institute of Finance
College of Management
Taipei, 106
Taiwan
+886233661092 (Phone)
+886283695581 (Fax)
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