Abstract
We tested the hypothesis of pro-cyclicality of the stock exchanges indices regarding economic activity of south-eastern European countries (SEE) in the Two-Stage Least Squares (TSLS) model in order to demonstrate the degree and pace of integration of ‘new’ financial markets into larger ones (EU). Rising stock prices in the SEE countries may be the sign of economic growth in the region in the light of the financial integration process. Results of panel estimates support the hypothesis of pro-cyclicality in the period of transition of the SEE region and financial integration, due to the opening of the market economy and re-pricing of systematic risk followed by large capital inflows, GDP growth, trade liberalisation and increased industrial production as well as the implementation of reforms regarding EU integration. Also significant is the negative coefficient of government debt in the SEE group results could be interpreted as a ‘contagion effect’ of the recent global financial crisis that spread beyond national borders.
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