Happy 20th birthday Euro: An integrated analysis of the stability status in the Eurozone’s equity markets



Abstract. We celebrate the 20th anniversary of the introduction of the Euro by reviewing one of the key elements: the integration of the Eurozone financial markets. Introducing a multivariate volatility test based on the asymmetrical BEKK (ABEKK) multivariate GARCH model of volatility to analyse the stable market pre-condition hypothesis of the integrated Eurozone equity markets across the euro’s timeline. Extending our analysis to the impact of the rise of the populist political movement on the Eurozone financial markets during the last few years. The first and most important contribution is the introduction of a multivariate volatility test based on the ABEKK to analyse the stability of the integration in the Eurozone equity markets. However, another key contribution is the analysis of a period where the whole concept of European integration is coming into question by the rise of the populist political movement. This research could be of importance to the ECB in stabilising the Eurozone financial markets as well as market participants in portfolio optimization within the Eurozone. Our results point to a difference in financial market integration depending on the definition. The empirical evidence found that market participants tend to react differently according to the affinity of the market participants to the event/news. In essence, market participants are driven by the “time and space” effect. This would point to evidence that the Eurozone equity markets was never truly integrated in the econometrics sense as defined later on. However, our literature review did identify evidence that the Eurozone equity markets was integrated in accordance with the definition of Baele et al., (2004). Hence it really does depend on the definition used. Generally, our policy recommendations are for a committee to be setup to unify the communication and actions of the European Union during crises. A better way of communicating the work and concept of the European Union to the population. Finally, a slower paced policy of integration to overcome the sense of loss national identity which recently many are plying on.

Keywords. Euro, European integration, Volatility test, Asymmetric BEKK, Multivariate GARCH, Volatility spillover, News contagion, Equity markets.

JEL. C12, C58, E44, F36, G15.


Euro; European integration; Volatility test; Asymmetric BEKK; Multivariate GARCH; Volatility spillover; News contagion; Equity markets.

Full Text:


Aye, G.C., Balcilar, M., Montasser, G., Gupta, R. & Manjezi, N.C. (2016). Can debt ceiling and government shutdown predict US real stock returns? A bootstrap rolling window approach. International Economics, 69(1), 11-31.

Baele, L. (2005). Volatility spillover effects in European equity markets. The Journal of Financial and Quantitative Analysis, 40(2), 373-401. doi. 10.1017/S0022109000002350

Baele, L., Ferrando, A., Hördahl, P., Krylova, E., & Monnet, C. (2004). Measuring financial integration in the Euro area, European Central Bank, Occasional Paper, No.14. [Retrieved from].

Baker, D. (2008). The housing bubble and the financial crisis. Real-World Economic Review, 46, 73-81.

Ball, R. (2009). Market and political/regulatory perspectives on the recent accounting scandals. Journal of Accounting Research, 47(2), 277-323. doi. 10.1111/j.1475-679X.2009.00325.x

Bate, D. (1999). Financial markets' assessments of EMU. Carnegie-Rochester Conference Series on Public Policy, 51, 229-269. doi. 10.1016/S0167-2231(00)00012-9

Bauwens, L., Laurent, S., & Rombouts, J.V.K. (2006). Multivariate garch models: A survey. Journal of Applied Econometrics, 21(1), 79-109. doi. 10.1002/jae.842

Bekaert, G., Harvey, C.R., & Lumsdaine, R.L. (2002). Dating the integration of World equity markets. Journal of Financial Economics, 65(2), 203-247. doi. 10.1016/S0304-405X(02)00139-3

Bekaert, G., Harvey, C.R., Lundblad, C., Lundblad, T., & Siegel, S. (2013). The European Union, the Euro, and equity market integration. Journal of Financial Economics, 109(3), 583-603. doi. 10.1016/j.jfineco.2013.03.008

Benston, G.J., & Hartgraves, A.L. (2002). Enron: What happened and what we can learn from It. Journal of Accounting and Public Policy, 21(2), 105–127. doi. 10.1016/S0278-4254(02)00042-X

Billio, M., & Pelizzon, L. (2003). Volatility and shocks spillover before and after EMU in European stock markets. Journal of Multinational Financial Management, 13(4-5), 323-340. doi. 10.1016/S1042-444X(03)00014-8

Bollerslev, T., Engle, R.F., & Wooldridge, J.M. (1988). A capital asset pricing model with time-varying covariances. Journal of Political Economy, 96(1), 116-131. doi. 10.1086/261527

Brickey, K. (2002). From Enron to Worldcom and beyond: Life and crime after Sarbanes-Oxley. Washington University Law Quarterly. 81(2). 357-401.

Brunnermeier, M.K. (2009). Deciphering the liquidity and credit crunch 2007-2008. The Journal of Economic Perspectives, 23(1), 77-100. doi. 10.1257/jep.23.1.77

Caballero, R.J., & Krishnamurthy, A. (2009). Global imbalances and financial fragility. American Economic Review: Papers & Proceedings, 99(2), 584–588. doi. 10.1257/aer.99.2.584

Cappiello, L., Hördahl, P., Kadareja, A., & Manganelli, S. (2006). The impact of the Euro on financial markets. European Central Bank, Working Paper, No.14. [Retrieved from].

Cetra, D., & Lineira, R. (2018). Breaking-up within Europe: Sub-state nationalist strategies in multilevel polities. Journal of Common Market Studies, 56(3), 717-729. doi. 10.1111/jcms.12710

Chen, A.H. & Siems, T.F. (2004). The effects of terrorism on global capital markets. European Journal of Political Economy. 20(2), 349-366. doi. 10.1016/j.ejpoleco.2003.12.005

Christiansen, C. (2007). Volatility-spillover effects in European bond. European Financial Management, 13(5), 923–948. doi. 10.1111/j.1468-036X.2007.00403.x

Codogno, L., & Galli, G. (2017). Italexit is not a solution for Italy’s problems. LSE European Politics and Policy, Blog 24 Feb 2017. Accessed: 13/12/2018. [Retrieved from].

Cohen, B.J. (2003). Global currency rivalry: Can the Euro ever challenge the Dollar? Journal of Common Markets Studies, 41(4), 575-595.

Danthine, J.P., Giavazzi, F., & Thadden, E.L. (2000). European financial markets After EMU: A first assessment. NBER Working Papers, No.8044. doi. 10.3386/w8044

Diebold, F.X. & Yilmaz, K. (2012). Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 28(1), 57–66. doi. 10.1016/j.ijforecast.2011.02.006

Dotz, N., & Fisher, C. (2011). What can EMU countries’ sovereign bond spreads tell us about market perceptions of default probabilities during the recent financial crisis? Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute, Working Paper, No.69. [Retrieved from].

Dungey, M., Fry, R., Gonzalez-Hermosillo, B., & Martin, V. (2007). Contagion in global equity markets in 1998: The effects of the Russian and LTCM Crises. The North American Journal of Economics and Finance, 18(2), 155-174. doi. 10.1016/j.najef.2007.05.003

Efimova, O., & Serletis, A. (2014). Energy markets volatility modelling using GARCH. Energy Economics, 43(C), 264-273. doi. 10.1016/j.eneco.2014.02.018

Ehrmann, M., & Fratzscher, M. (2002). Interdependence between the Euro Area and the US: What role for EMU. European Central Bank, Working Paper, No.200. [Retrieved from].

Emenike, K.O. (2014). Volatility transmission and asymmetric linkages between the stock and foreign exchange markets: A sectoral analysis. Journal of Banking and Financial Economics, 1(1), 59–72. doi. 10.1108/10867371111110543

Engle, R.F. (2002). Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business & Economic Statistics, 20(3), 339-350. doi. 10.1198/073500102288618487

Engle, R.F., & Kroner, K.F. (1995). Multivariate simultaneous generalized ARCH. Econometric Theory, 11(1), 122-150. doi. 10.1017/S0266466600009063

Fakhry, B. (2019). Did Brexit change the behaviour of the UK’s financial markets? Journal of Economics and Political Economy, 6(2), 98-121.

Fakhry, B., & Richter, C. (2016a). Testing the efficiency of the sovereign debt market using an asymmetrical volatility test. Journal of Management and Training for Industries, 3(2), 1-15.

Fakhry, B., & Richter, C. (2016b). Testing the efficiency of the GIPS sovereign debt market using an asymmetrical volatility test. Journal of Economics and Political Economy, 3(3), 524-535.

Fakhry, B., & Richter, C. (2018). Does the federal constitutional court ruling mean the German financial market is efficient? European Journal of Business Science and Technology, 4(2), 111-125. doi. 10.11118/ejobsat.v4i2.120

Favero, C., & Missale, A. (2011). Sovereign spreads in the Euro area. Which prospects for a Eurobond?. Economic Policy, 27(70), 231–273. doi. 10.1111/j.1468-0327.2012.00282.x

Feldstein, M. (1997). EMU and international conflict. Foreign Affairs, 76(6), 60-73.

Fernandez, V. (2008). The war on terror and its impact on the long-term volatility of financial markets. International Review of Financial Analysis, 17(1), 1-26. doi. 10.1016/j.irfa.2006.11.003

Fligstein, N., Polyakova, A., & Sandholtz, W. (2012). European integration, nationalism and European identity. Journal of Common Market Studies, 50(S1), 106-122. doi. 10.1111/j.1468-5965.2011.02230.x

Fratzscher, M. (2002). Financial market integration in Europe: On the effects of EMU on stock markets. International Journal of Finance & Economics, 7(3), 165-193. doi. 10.1002/ijfe.187

Galati, G., & Tsatsaronis, K. (2003). The impact of the Euro on Europe’s financial markets. Financial Markets, Institutions & Instruments, 12(3), 165-220.

Groba, J., Lafuente, J.A., & Serrano, P. (2013). The impact of distressed economies in the EU sovereign market. Journal of Banking & Finance, 37(7), 2520–2532. doi. 10.1016/j.jbankfin.2013.02.003

Guiso L., Herrera, H., Morelli, M., & Sonno, T.(2018). Global crises and populism: The role of Eurozone institutions.Centre for Economic Policy Research, Discussion Papers, No.12944. [Retrieved from].

Hardouvelis, G.A., Malliaropulos, D., & Priestley, R. (2006). EMU and European stock market integration. Journal of Business, 79(1), 365-392. doi. 10.1086/497414

Hobolt, S.B. (2016). The Brexit vote: A divided nation, a divided continent. Journal of European Public Policy, 23(9), 1259-1277. doi. 10.1080/13501763.2016.1225785

Inglehart, R.F., & Norris, P. (2016). Trump, Brexit, and the rise of populism: Economic have-nots and cultural backlash. Harvard Kennedy School, HKS Faculty Research, Working Paper Series, No.RWP16-026. [Retrieved from].

Jansen, R.S. (2011). Populist mobilization: A new theoretical approach to populism. Sociological Theory, 29(2), 75-96. doi. 10.1111/j.1467-9558.2011.01388.x

Johnston, R.B. & Nedelescu, O.M. (2006). The impact of terrorism on financial markets. Journal of Financial Crime, 13(1), 7-25. doi. 10.1108/13590790610641233

Kim, S.J., Moshirian, F., & Wu, E. (2015). Dynamic stock market integration driven by the European monetary union: An empirical analysis. Journal of Banking and Finance, 29(10), 2475–2502. doi. 10.1016/j.jbankfin.2004.09.002

Lane, P.R., & Walti, S. (2006). The Euro and financial integration. Trinity College Dublin, Institute for International Integration Studies, Discussion Paper, No.139. [Retrieved from].

Li, H. (2007). International linkages of the Chinese stock exchanges: a multivariate GARCH analysis. Applied Financial Economics, 17(4), 285-290. doi. 10.1080/09603100600675557

Louzis, D.P. (2013). Measuring return and volatility spillovers in Euro area financial markets. Bank of Greece, Working Paper, No.154. [Retrieved from].

Lowenstein, R. (2000). When Genius Failed: The Rise and Fall of Long-Term Capital Management. London: Fourth Estate.

Luo, CM. (2017). The rise of populist right-wing parties in the 2014 European Parliament: Election and implications for European integration. European Review, 25(3), 406–422. doi. 10.1017/S1062798717000126

MacDonald, R., Sogiakas, V., & Tsopanakis, A. (2018). Volatility co-movements and spillover effects within the Eurozone economies: A multivariate GARCH approach using the financial stress index. Journal of International Financial Markets, Institutions and Money, 52(C), 17-36. doi. 10.1016/j.intfin.2017.09.003

Masood, O. (2009). Balance sheet exposures leading toward the credit crunch in global investment banks. The Journal of Credit Risk, 5(2), 57-76.

McCauley, R.N., & White, W.R. (1997). The Euro and European financial markets. Bank for International Settlements, Working Paper, No.41. [Retrieved from].

Metui, N. (2011). Financial contagion in developed sovereign bond markets. Maastricht University, Maastricht Research School of Economics of Technology and Organization, Research Memorandum, No.RM/11/004.

Missio, S., & Watzka, S. (2011). Financial contagion and the European debt crisis. CESifo, Working Paper, No.3554. [Retrieved from].

Mohl, P., & Sondermann, D. (2013). Has political communication during the crisis impacted sovereign bond spreads in the euro area? Applied Economics Letters, 20(1), 48-61. doi. 10.1080/13504851.2012.674201

Mudde, C. (2004). The populist zeitgeist. Government and Opposition, 39(4), 541-563. doi. 10.1111/j.1477-7053.2004.00135.x

Mudde, C., & Kaltwasser, C.R. (2013). Exclusionary vs. inclusionary populism: Comparing contemporary Europe and Latin America. Government and Opposition, 48(2), 147­174. doi. 10.1017/gov.2012.11

Nippani, S., & Smith, D.S. (2014). The impact of the October 2013 government shutdown and debt ceiling on U.S. treasury default risk. Journal of Fixed Income, 24(2), 79-91. doi. 10.2469/dig.v45.n1.10

Pagan, A.R., & Sossounov, K.A. (2003). A simple framework for analysing bull and bear markets. Journal of Applied Econometrics, 18(1), 23-46. doi. 10.1002/jae.664

Papaioannou, et al., (2006). Optimal currency shares in international reserves: The impact of the Euro and the prospects for the Dollar. Journal of the Japanese and International Economies, 20(4), 508-547. doi. 10.1016/j.jjie.2006.07.002

Pericoli, M., & Sbracia, M. (2003). A primer on financial contagion. Journal of Economic Surveys, 17(4), 571-608. doi. 10.1111/1467-6419.00205

Polyakova, A., & Fligstein, N. (2016). Is European integration causing Europe to become more nationalist? Evidence from the 2007–9 financial crisis. Journal of European Public Policy, 23(1), 60-83. doi. 10.1080/13501763.2015.1080286

Schwarcz, S.L. (2011). Facing the debt challenge of countries that are ‘too big to fail’. in R.W. Kolb (ed.), Sovereign Debt: From Safety to Default, (pp.425-431), Hoboken (New Jersey): John Wiley & Sons.

Shiller, R.J. (1979). The volatility of long-term interest rates and expectations models of the term structure. The Journal of Political Economy, 87(6), 1190-1219. doi. 10.1086/260832

Shiller, R.J. (1981). The use of volatility measures in assessing market efficiency. The Journal of Finance, 36(2), 291-304. doi. 10.1111/j.1540-6261.1981.tb00441.x

Sidak, J.G. (2003). The failure of good intentions: The WorldCom fraud and the collapse of American telecommunications after deregulation. Yale Journal on Regulation, 20(2), 207-267.

Silvennoinen, A., & Terasvirta, T. (2008). Multivariate GARCH models. in T.G. Andersen, R.A. Davis, J.-P. Kreiss, & T. Mikosch (eds.), Handbook of Financial Time Series, (pp.201-229), New York: Springer.

Tamakoshi, G. (2011). European sovereign debt crisis and linkage of long-term government bond yields. Economics Bulletin, 31(3), 2191-2203.

Trabelsi, M.A., & Hmida, S. (2018). A dynamic correlation analysis of financial contagion: Evidence from the Eurozone stock markets. Entrepreneurial Business and Economics Review, 6(3), 129-141. doi. 10.15678/EBER.2018.060308

Trichet, J.C. (2001). The Euro after two years. Journal of Common Market Studies, 39(1), 1-13. doi. 10.1111/1468-5965.00273

Wang, P., & Wang, P. (2005). Price and volatility spillovers between the greater China markets and the developed markets of US and Japan. Global Finance Journal, 21(3), 3304-317. doi. 10.1016/j.gfj.2010.09.007

Weyland, K. (2001). Clarifying a contested concept: Populism in the study of Latin American politics. Comparative Politics, 34(1), 1-22. doi. 10.2307/422412

DOI: http://dx.doi.org/10.1453/jepe.v6i3.1919


  • There are currently no refbacks.


Journal of Economics and Political Economy - J. Econ. Pol. Econ. - JEPE - www.kspjournals.org

ISSN: 2148-8347

Editor: jepe@ksplibrary.org   Secretarial: secretarial@ksplibrary.org   Istanbul - Turkey.

Copyright © KSP Library