یکپارچه سازی پویای بازار سهام توسط اتحادیه پولی اروپا: تجزیه و تحلیل تجربی

We examine the influence of the European Monetary Union (EMU) on the dynamic process of stock market integration over the period 2 January 1989–29 May 2003 using a bivariate EGARCH framework with time-varying conditional correlations. We find that there has been a clear regime shift in European stock market integration with the introduction of the EMU. The EMU has been necessary for stock market integration as unidirectional causality was found. Linear systems regression analysis shows that the increase in both regional and global stock market integration over this period was significantly driven in part, by macroeconomic convergence associated with the introduction of the EMU and financial development levels.

There is no doubt that capital market integration was one motivation for the European Economic and Monetary Union (EMU). The euro was introduced as the single currency for the EMU on January 1st, 1999 following an economic, monetary and financial convergence process that had spanned over two decades from the initial creation of the European Monetary System (EMS). The political creation of the euro presents a learning model for understanding the financial effects of currency unions given that the euro was introduced without a single euro area financial market. The concept of financial market integration is central to the international finance literature. It is well accepted in the theoretical literature that integration of financial markets is fundamentally linked to economic growth through risk sharing benefits, improvements in allocational efficiency and reductions in macroeconomic volatility (see Pagano, 1993, Prasad et al., 2003 and Baele et al., 2004). Given the significant potential benefits from financial market integration, this paper investigates the nature and the determinants of stock market integration with a view to evaluating the effectiveness of the EMU in its promotion. First, we discuss how European stock market linkages and integration dynamics have evolved over the past fifteen years on both a regional and global scale in response to the economic convergence process associated with the formation of the EMU. Second, we address the causality issue between currency unions and financial market integration to improve our understanding on the sequencing of financial market integration. Finally, we identify the factors that determine these integration patterns in a new empirical context and assess whether they are consistent for both regional and global stock market integration. The research questions addressed in this paper have obvious implications for policy-makers in an increasingly interdependent global financial architecture and for investors’ asset allocation decisions.1 There is a clear need to better understand how and why the EMU has affected stock markets because of their important role in facilitating financing and investment decisions. In principle, it is reasonable for investors to view a single currency zone as a single area of financial opportunity. To a large extent, financial market integration is driven by market forces but constrained by regulatory barriers and the level of integration is not uniform across market segments nor across time. Hence, financial markets and investment returns should be driven to some time varying degree of convergence.2 Recent studies by Hardouvelis et al., 1999, Fratzscher, 2002, Morana and Beltratti, 2002 and Yang et al., 2003 and Baele (in press) provide empirical evidence on the impact of the introduction of the euro on European stock markets. However, these studies remain incomplete and have the following shortfalls: (i) They are confined to stock market changes up to 2001 and cover only selected EMU countries. Thus longer term, post-euro impacts on international stock markets from the European currency unification are not well documented nor understood. Convergence towards the weighted average of the 12 members of the EMU has never been fully assessed. It is not even clear to what extent the formation of the EMU has changed the integration process of European stock markets. 3 (ii) These studies have merely associated the changes in European stock markets to various aspects of the currency union without addressing the fundamental causal relationship between the two. (iii) European stock market integration has only ever been assessed on a country by country basis and rarely as a group or system of member states which are similar by nature of their common convergence towards the EMU. (iv) Although these studies attempt to explain why European stock markets have changed with the introduction of the euro, their findings are conflicting especially with respect to the reduction in exchange rate risk. Fratzscher (2002) and Baele (in press) find a key role for exchange rate stability and economic convergence leading up to the euro’s launch, whilst Morana and Beltratti (2002) attributes changes in stock market volatility to the unification of interest rates and stabilization of macroeconomic fundamentals and not to the elimination of exchange rate risk and (v) Seasonal effects have not been examined despite their presence in other international stock market studies (e.g., Longin and Solnik, 1995 and Karolyi and Stulz, 1996 and Carrieri et al., 2001). To address these gaps and disparities in the existing literature and to contribute an updated analysis on the extent to which stock market integration has been driven by the EMU, in this study we construct a bivariate daily exponential generalized autoregressive conditional hetereoskedasticity (EGARCH) model for individual and value-weighted regional stock index returns. We focus primarily on documenting and explaining the time varying conditional correlations between these time series during the lead up to the establishment of the European currency union and beyond. Our contributions to the literature are in: (i) Providing more comprehensive evidence from all pre-enlargement EU15 members as well as Japan and the US on the evolution of stock market integration at the regional and global level over a longer post-euro period; (ii) Illustrating a two step estimation methodology that is suitable for empirical research on financial market integration; (iii) Providing quantitative estimates on national and regional linkages between international equity markets during the different phases of European stock market integration; (iv) Addressing the causal relationship between the EMU and stock market integration and (v) Using additional information captured in linear systems estimations to find the determinants of stock market integration, including seasonal effects. Our main findings with the benefit of a longer post-euro sample period are: (i) a clear regime shift in stock market comovements within the EU and deeper stock market linkages with the introduction of the euro; (ii) a currency union is necessary for financial market integration as the EMU has caused stock market integration between member states and vis-à-vis Japan and the US; (iii) stock market integration is primarily a persistent and seasonal process where stock market development and existing levels of integration are vital; (iv) the January effect is significant but contrary to Karolyi and Stulz’s (1996) study on the comovements between Japanese and US stock market returns, we find little evidence for day of the week effects in comovements with stock markets in the EMU and (v) whilst the EMU has fostered stock market integration, we find that the reduction in exchange rate volatility has only been important for the smaller member states with historically different economic structures and that economic convergence within the region has had differing impacts on the integration of European stock markets in our sample period. The rest of the paper is organized in the following way. Section 2 provides a brief literature review. Section 3 offers discussions on the data and methodology as well as the findings on the nature of stock market integration over time. Section 4 examines the role of various determinants of the stock market integration process. Finally, concluding remarks are presented in Section 5.

The aim of this paper was to investigate the dynamic nature and determinants of regional and global stock market integration. We have documented that both intra-regional and inter-regional stock market integration was highly volatile prior to the second half of the 1990s and it had increased rapidly in the two years leading up to the official launch of the euro. Since 1999, the process has been much stronger and more stable than before and with the benefit of a longer post-euro sample period, a regime shift is revealed for integration in all EMU stock markets. As a result, intra-regional and inter-regional return and volatility spillovers have been heightened in the period characterized by the introduction of the euro. We have also managed to shed light on the gaps and disparities in the link between currency unions and financial market integration. In particular, we have established unidirectional causality from the political creation of the European currency union to the integration between stock markets within EMU member states and also with Japan and the US. Moreover, our two step systems estimation approach for the group of EMU members reveals that increasing stock market comovements can be explained with the overall macroeconomic convergence process associated with the introduction of the euro rather than the specific effects of the elimination of foreign exchange rate risk due to the currency unification. However, financial market integration is largely a self-fuelling process dependent on existing levels of financial sector development and is particularly strong during the month of January. In addition, we have found that the contribution of currency stability to stock market integration is only significant for the smaller EMU members with historically different economic structures. As a result of the European Monetary System introduced in 1979, the euro was already a very close substitute for most major European currencies. On a global level, the commitment to price stability has significantly strengthened stock market integration between the EMU and the US whilst convergence in the industrial production has increased ties between the EMU and Japan. Although diversification benefits have reduced, the process of financial integration remains incomplete for the smaller member states and opportunities to invest in the eurozone remains. Complete integration of Europe’s stock markets will ultimately depend on many factors and the removal of other impediments will take some time.