Stock market linkages among new EMU members and the euro area: Implications for financial integration and portfolio diversification

摘要

Purpose - The purpose of this paper is to focus on the empirical dimension of financial integration among the five newest members of the European Monetary Union (Cyprus, Estonia, Malta, Slovakia and Slovenia) and the euro area. The main objective is to study the level and the speed of integration between the stock markets of those European Union (EU) member states and the rest of the euro area, assessing in this way the role that the EU enlargement, the drive towards European Monetary Union and the actual adoption of the euro play in the process of European financial market integration. Design/methodology/approach - This study will exclusively test the integration of the stock markets of EU member states that joined in 2004, when the EU expanded, but are already members of Economic and Monetary Union (EMU). Since there is limited evidence on the effects of EU and EMU enlargements or their announcements, it will be a useful addition to the examination of this issue. Given the small size of those emerging stock markets and the fact that they are part of a stable and well-regulated system, the degree to which they are integrated has implications for investors' portfolio allocation decisions, as they may offer diversification benefits without extreme risks. The case of integration will be examined using various econometric methodologies, two of which (beta- and sigma-convergence) have been given less formal attention and their application is rare, so as to detect both long- and short-run interdependencies and achieve robust results. Findings - The findings indicate an increasing degree of integration for Malta and Slovenia, while Estonia appears segmented. Cyprus and Slovakia exhibited a degree of integration after their accession into EU but this trend changes after they adopted the euro. Overall, the integration process accelerated after the accession in the EU but EMU does not seem to have the same positive impact on it. Originality/value - Compared with previous studies, the authors' apply the concept of beta- and sigma-convergence, a methodology that will help us identify the speed of integration. Moreover, the period under study includes the recent crisis: this allows us to see if the worsened economic environment has had effect on the level and speed of integration of the countries under study. In the end, it is worth noting that previous studies focused on either advanced markets or neighbouring countries or states with a common history. This alone can create a level of interdependence between the countries under study and bias the results. In this paper, the markets under study have almost nothing in common except their small size and the fact that they are members of the EMU.