European Financial Markets: The Effects of European Union by Tony Southall

By Tony Southall

EU club includes political and financial reforms
which impact monetary markets within the new member states.
This learn empirically explores and quantifies the results of
EU accession at the threat and go back of fairness markets in 8
Central and japanese eu markets becoming a member of the ecu in 2004.
The examine additionally includes a evaluate of the way the impact of
macroeconomic variables and the extent of integration with
global and ecu markets swap because of
EU club.
Based on empirical exams utilizing weekly information over ten years,
this examine concludes that ecu club ends up in a
significant decline in fairness industry volatility and a
significant bring up in risk-adjusted, yet now not absolute,
equity returns. additionally, the research means that fairness
markets in new ecu member states develop into more and more
influenced by means of worldwide instead of neighborhood macroeconomic
factors after the european accession and that the extent of integration
with international markets raises.

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Extra resources for European Financial Markets: The Effects of European Union Membership on Central and Eastern European Equity Markets

Sample text

However, with an analysis of the overall correlation between two markets, little can be concluded 36 3 Definition of Research Questions and Hypotheses about the reasons for any potential change. Therefore, the second research hypothesis builds on existing academic research as well as the expectations that equity markets will be influenced by a different mix of local versus global factors in trying to determine how this mix has changed as a result of EU accession. , 2000). This view is supported by other research findings where it is found that the cost of equity capital in segmented markets is related to the local volatility of the particular market while the cost of capital in integrated markets on the other hand is related to the covariance with world market returns (Bekaert and Harvey, 2000).

One of these barriers relates to the fact that domestic investors might favour domestic assets to foreign assets in what is commonly defined as home bias (Tesar and Werner, 1992, 1995). Other barriers to market integration include poor credit ratings, high and variable inflation, exchange rate controls, the lack of a high-quality regulatory and accounting framework, the lack of sufficient country funds or cross-listed securities, and the limited size of a stock market (Bekaert, 1995). 2 Theory of Market Integration Market integration is a complicated process influenced by several domestic and international factors.

First, given unchanged expected future cash flows, the equity price index of a market experiencing integration should increase as information about liberalisation and corresponding expected integration is announced (Henry, 2000). Second, as the risk premium and capital costs decline, additional investment projects become economically feasible which should lead to higher growth and welfare generation in the economy as a whole (Henry, 2000; Stulz, 1999). 2 Market Integration 19 are likely to increase during the actual integration process (Bekaert and Harvey, 2003).

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