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How did the Sovereign debt crisis affect the Euro financial integration? A fractional cointegration approach

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Abstract

This paper examines financial integration among stock markets in the Eurozone using the prices from each stock index. Monthly time series are constructed for four major stock indices for the period between 1998 and 2016. A fractional cointegrated vector autoregressive model is estimated at an international level. Our results show that there is a perfect and complete Euro financial integration. Considering the possible existence of structural breaks, this paper also examines the fractional cointegration within each regime, showing that Euro financial integration is very robust. However, in the financial and sovereign debt crisis regime, IBEX 35 appears to be the weak link in Euro financial integration, unless Euro financial integration recovers when this period ends.

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Notes

  1. The stock markets studied include the German stock market, the behavior of which is reflected in the DAX index; the French stock market, reflected in the CAC 40 index; the Italian stock market, as indicated by the FTSE MIB index; and the Spanish stock market, as shown by the IBEX 35 index. The choice of a stock market is based on the size of the respective national economy and the capitalization of the stock markets, which are the major ones in the Eurozone.

  2. Lo and Mackinlay (1988) examined the predictability of time series by comparing the variances of differences in the data calculated over different intervals.

  3. Henceforth, we consider the relationships denoted by inter-markets to be the relationships among markets.

  4. Forbes and Rigobon (2002) explained co-movement as contagion, i.e., as a significant increase in cross-market linkages after a shock to one country or group of countries.

  5. An alternative to our application is to take into account structural breaks, aiming to control the dynamics. As suggested by Johansen (2014), in practice, it is important to check the breaks in the dynamics. From this perspective, Hansen and Johansen (1999) proposed the theory of recursive estimation in the standard cointegration model.

  6. In order to test the presence of unit roots, the estimates were obtained using first-differenced data, because the original series might be above 0.5 and this test requires that the results are limited to the interval -0.5 < d < 0.5, then adding 1 to obtain the proper estimates of d.

  7. Hypothesis testing is explained in paragraph 3, Methodology.

  8. If a stock market is weakly exogenous, anticipations in this stock market do not adjust to shifts in anticipations for other markets.

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Authors and Affiliations

  1. Department of Economics, University of Huelva, Plaza de la Merced, 11, 21002, Huelva, Spain

    José Carlos Vides & Antonio A. Golpe

  2. Department of Financial Economics and Operations Management, University of Seville, Avda. Ramón y Cajal 1, 41019, Seville, Spain

    Jesús Iglesias

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  1. José Carlos Vides
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  2. Antonio A. Golpe
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  3. Jesús Iglesias
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Correspondence to Antonio A. Golpe.

Appendix

Appendix

1.1 Original sample

Table 11 Lag length selection
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Table 12 Cointegration rank test
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1.2 Regime 1

Table 13 Cointegration rank test
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1.3 Regime 2

Table 14 Cointegration rank test
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1.4 Regime 3

Table 15 Cointegration rank test
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1.5 Regime 4

Table 16 Cointegration rank test
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Vides, J.C., Golpe, A.A. & Iglesias, J. How did the Sovereign debt crisis affect the Euro financial integration? A fractional cointegration approach. Empirica 45, 685–706 (2018). https://doi.org/10.1007/s10663-017-9386-2

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