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The Euro and European Financial Market Dependence

34 Pages Posted: 15 Aug 2006 Last revised: 11 Mar 2014

Yaw-Huei Wang

National Taiwan University

Söhnke M. Bartram

Warwick Business School - Department of Finance

Stephen J. Taylor

Lancaster University - Department of Accounting and Finance

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Date Written: August 19, 2010

Abstract

A time-varying copula model is used 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-MA-t model for the marginal distributions and the Gaussian copula for the joint distribution, which allows capturing time-varying, non-linear relationships. 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. 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. The UK and Sweden, but not other European 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.

Keywords: Euro, international finance, dependence, copula, GARCH

JEL Classification: F3, F4, G1

Suggested Citation

Wang, Yaw-Huei and Bartram, Söhnke M. and Taylor, Stephen J., The Euro and European Financial Market Dependence (August 19, 2010). Journal of Banking and Finance, Vol. 51, No. 5, pp. 1461-1481, May 2007. Available at SSRN: https://ssrn.com/abstract=924333

Yaw-Huei Wang (Contact Author)

National Taiwan University ( email )

Department and Graduate Institute of Finance
College of Management
Taipei, 106
Taiwan
+886233661092 (Phone)
+886283695581 (Fax)

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

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

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