Financial Integration in Europe : a Cointegration Analysis of European Stock Markets

Sammanfattning:

This thesis has studied short and long-term dependence structures between European stock markets. Johansen's test for cointegration and Granger's test for non-causality have been applied in order to measure the degree of financial integration in Europe. The cointegration analysis has employed a comparative perspective in which different countries with different institutional adaptation to the economic cooperation within Europe have been considered.

The study finds strong support for the existence of cointegration between the Belgian, Norwegian, Swiss and British stock markets in the period after the launch of the euro. This result indicates that financial integration has increased in Europe since no cointegration was identified prior to the introduction of the euro. However, it is more difficult to determine to what extent the European financial cooperation has affected the degree of integration because of the difficulties with isolating formal treaties contribution to the stationary equilibrium. Both the EU and the euro's importance may have affected the integration process, but this thesis finds that this is not the only explanation. Thus, it is more likely that the liberalization of financial markets and the overall integration process best explain the increase in financial integration.

The most significant finding is that the cointegrated stock markets in the long-term can be regarded as a regional financial market characterized by similar systematic risk factors. This has implications for both policy-makers who adjust existing policies in Europe and investors looking to allocate portfolios in an efficient manner.