European Union Enlargement and Equity Markets in Accession Countries

Dvorak, Tomas; Podpiera, Richard

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European Union Enlargement and Equity Markets in Accession Countries

IMF Working Paper No. 05/182

28 Pages Posted: 3 Mar 2006

See all articles by Tomas Dvorak

Richard Podpiera

International Monetary Fund (IMF); Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences

There are 2 versions of this paper

Date Written: September 2005

Abstract

The announcement of the European Union enlargement coincided with a dramatic rise in stock prices in accession countries. This paper investigates the hypothesis that the rise in stock prices was a result of the repricing of systematic risk due to the integration of accession countries into the world market. We found that firm-level stock price changes are positively related to the difference between a firm's local and world market betas. This result is robust to controlling for changes in expected earnings, country effects, and other controls, although the magnitude of the effect is not very large. The differences between local and world betas explain nearly 22 percent of the stock price increase.

Keywords: asset pricing, international financial integration, EU enlargement

JEL Classification: F36, G15, G12

Suggested Citation: Suggested Citation

Dvorak, Tomas and Podpiera, Richard, European Union Enlargement and Equity Markets in Accession Countries (September 2005). IMF Working Paper No. 05/182, Available at SSRN: https://ssrn.com/abstract=888051