European Financial Markets The Effects of European Union Membership
EU membership involves political and economic reforms which influence financial markets in the new member states. This study empirically explores and quantifies the effects of EU accession on the risk and return of equity markets in eight Central and East
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Tony F. Southall
European Financial Markets The Effects of European Union Membership on Central and Eastern European Equity Markets
Physica-Verlag A Springer Company
Tony F. Southall Fröhlichstrasse 39 8008 Zürich Switzerland [email protected]
ISBN 978-3-7908-2073-7
e-ISBN: 978-3-7908-2074-4
DOI: 10.1007/978-3-7908-2074-4 Library of Congress Control Number: 2008930209 © 2008 Physica-Verlag Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg Printed on acid-free paper 9 8 7 6 5 4 3 2 1 springer.com
Abstract
European Union (EU) accession involves both political and economic reforms which suggest changes with regard to financial markets. This study contains empirical tests of four research questions relating to the effects of EU accession. The initial question relates to effects on the level of integration between equity markets in European transition economies and those in global as well as European economies. The second research question explores changes in the level of influence of global and local macroeconomic factors on equity market performance. The last two questions explore the impact of EU accession on equity market volatility and return levels. The study is based on data samples taken from eight markets which accessed the EU in May 2004. The study provides evidence of a significant increase in the level of equity market integration, measured by co-movement between equity indices in transition economies and global reference indices. This implies that while successful market liberalisation involves an increase in the level of co-movement, as is concluded in existing academic research, further equity market co-movement can be expected as a result of EU accession. With regard to the co-movement with European reference indices, the results of the study suggest that increases occur at stages prior to the actual EU accession announcement and that no statistically significant change occurs in association with EU accession. The study also provides evidence suggesting that the influence of macroeconomic factors shifts from local to global factors in association with the EU accession. Global factors demonstrate a significant increase in explanatory power after the
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