The Euro and European financial market dependence

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. The Euro and European Financial Market Dependence AbstractA 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.

Dynamics of the co-movement between stock and maritime markets

“…The primary focus is on understanding and estimating the linkage of two or more financial markets while recent studies on co-movement analysis have focused on the combinations of stock prices on one hand and commodity prices, exchange rates or equity markets on the other (see Antoniou, Pescetto, & Violaris, 2003;Bartram, Taylor, & Wang, 2007;Bhar & Hammoudeh, 2011;Kim, Moshirian, & Wu, 2006;Lin, 2012;Martens & Poon, 2001;Savva, 2009;Wahab, 2012). Specifically, studies with methodologies similar to our study; Erdogan and Schmidbauer (2005) for currency and stock markets, Chiang, Jeon, and Li (2007) for a number of Asian stock markets, Li and Zou (2008) for Chinese capital markets (bond vs. stock markets), Savva, Osborn, and Gill (2009) for US and European stock markets, Lin, Menkveld, and Yang (2009) for Chinese and Western capital markets, Aslanidis, Osborn, and Sensier (2010) for US and UK capital markets, and Syllignakis and Kouretas (2011) for Central and Eastern Europe (CEE), US, German and Russian stock markets, have all remarked that the markets in question experienced a process of co-movement in varying degrees.…”

The Impact of Order Flow on the Foreign Exchange Market: A Copula Approach

“…Various copula functions have been suggested by researchers (see Nelsen 1999), and this study adopts three copulas, a standard normal (Gaussian) version and the Clayton and Gumbel copulas, which are customarily used in the extant financial economics literature (e.g., Patton 2006; Bartram et al 2007;Rodriguez 2007). The one virtue of copula functions is that they enable the analyst to measure tail dependence.…”

“…The third term in Eq. 6 assumes that the mean difference between the last w observations of u i,t and v i,t captures any variation in dependence (Patton 2006; Bartram et al 2007). These reasonable assumptions enable me to estimate a state-dependent correlation coefficient between x i,t and y i,t .…”

“…Because Eq. 17 contains a large set of parameters, I have used a two-stage estimation procedure to obtain the set of estimated parameters,θ, a method that was also adopted by Bartram et al (2007). The two-step estimator for the state-dependent copula parameter is valid if the degree of dependence (θ c ) does not affect the conditional margins.…”

European bank equity risk: 1995–2006

“…Yet, the European banking literature offers little guidance as to the impact of EMU on the European bank equity risk. It is also important to note the increase in equity market co-movement observed between euro-zone countries and neighbouring non-euro-zone countries (Allen andSong, 2005 andBartram et al, 2007).…”