Capital Market Integration. New Challenges in an Enlarged Europe

Author:Delia-Elena Diaconasu
Performance and Risks in the European Economy
Capital Market Integration. New Challenges in an Enlarged Europe
Delia-Elena Diaconaşu1
Abstract: The purpose of this paper is to analyse the linkages between Emerging European stock markets and
the developed ones, in relatively stable times that followed the global economic crisis. One of the main
reasons that served as an argument in studying stock market integration relies in the prior contradictory
results regarding the regional versus international interdependencies. Using a Vector Error Correction Model
we tested if the Central and Eastern European markets are more internationally or regional integrated. Our
findings suggest that the stock exchanges from CEE react mainly to the arrival of price innovations from the
most mature market in the EU perimeter. The main contrib ution of this paper is that it pro vides further
evidence on stock market integration and correlations in emerging stock markets, emphasizing new
connections between London Stock Exchange and the other CEE stock markets. The results are of particular
interest for both portfolio managers and policymakers.
Keywords: emerging stock markets; interdependencies; price innovation
JEL Classification: C13; G15; F21
1 Introduction
On the background of European Union accession of eleven new member states, the capital markets
from Emerging Europe have registered a considerably development, which lasted until the global
economic and financial crisis of 2008. Unfortunately, the global crisis revealed major EU issues,
issues that are related to the institutional weaknesses of the Euro perimeter. As an example we
mention: Greece did not meet the convergence criteria on a sustainable basis at the time of joining the
euro area, the existence of budget deficits exceeding the 3% limit, high government debt, the
mispricing of risk by capital markets and an ensuing misallocation of capital that had the effect of
giving wrong incentives to policymakers, the fact that democracies and financial markets did not
operate ―on the same clock‖, the Western governments being blamed for the excessive deregulation of
financial markets and for their growing dependence on borrowing (Tsoukalis, 2012), the fact the
monetary policy rate is not sufficient for maintaining both price and financial stability (Schwartz,
2003), etc.
Briefly, in Central and Eastern Europe (CEE) it all started like this: the first market affected was
Hungary that registered a significant reduction in portfolio investments. Shortly after, Romania and
Bulgaria were contaminated; two countries that were struggling with a substantial foreign currency
1Scientific Researcher, ―Alexandru Ioan Cuza‖ University of Iasi, Romania, Address: 22, Carol I Blvd., 700505, Iasi,
Romania, Tel.: +40 232 201 428, Corresponding author: Corresponding author:

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