Abstract
The study of stock market integration has been renewed with strong attention from the 2008 global financial crisis. This study examines the stock return comovements between each European Emerging markets (EEM) with the largest financial markets including US (S & P 500), UK (FTS100), German (DAX100), and France (CAC40), respectively. The European Emerging markets include Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Slovenia. The correlation between co-movements between each European emerging market with US, UK, Germany and France in line with economic integration and institutions in the period of 2002-2015 are presented. Such analysis offers an opportunity to investigate the economic and institutional integration of emerging countries in a European context (with US market as an indicator of a non-European environment).
Highlights
In order to conduct risk hedging through global diversification in portfolio management, financial investors have to understand co-movements of stock markets and the sensitivity of the markets to exogenous shocks [1]
Despites that tremendous studies have examined the degree of dependence among stock markets, the attention to the integration of stock markets has been renewed strongly in the recent global financial crisis, where the investigation of other determinants to what extent the equity market integration depends on how countries are financially, economically integrated, and otherwise is got interested from researchers (Asgharian et al, 2013)
This article offers three contributions: First, this paper offers an empirical study on the concept of European integration by examining the impact of institutions on stock return co-movements; Second, our analysis has significant contribution to the literature on the field of the interactions between institution and macroeconomic factors on financial integration, especially about the associations between institutions and European integration including trade openness, inward Foreign Direct Investment (FDI), inward Foreign Portfolio Investment (FPI) have significant impacts on stock return co-movements; Third, this study has significant contributions to the practice by the implications for the international portfolio diversification
Summary
In order to conduct risk hedging through global diversification in portfolio management, financial investors have to understand co-movements of stock markets and the sensitivity of the markets to exogenous shocks [1]. This is important for authorizers in conducting macroeconomic policies since the propagation of shock impacts on the stability of the financial system and overall economy. For instance [5] [8] [9] [10] use countries’ bilateral trade and exchange rate changes to measure integration in modelling time-varying spillover effects among international stock markets. Other studies use the gravity model to investigate the importance of financial and economic integration on stock market co-movements, where they make a regression with correlations among national stock markets on countries’ economic sizes measured by GDP or market capitalization, and bilateral distances measured by cross-country-specific variables such as geographical distance [11] [12] [13] [14]. The influences of institution on stock return co-movements are still under-investigated
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