Determinants of European Stock Market Integration
Posted: 13 Mar 2012
Date Written: March 13, 2012
We analyze 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 capitalization, 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 capitalization and hindered by foreign exchange risk between old member states and the euro area. Interest rate spreads and business cycle synchronisation are also significant factors in explaining equity market integration.
Keywords: Stock market integration, European unification, DCC-MGARCH model
JEL Classification: E44, F3, F36, G15
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