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Time-Varying Synchronization of European Stock Markets

The extent and dynamics of capital market synchronization represents a vital research area as it is important for equity portfolio selection (Erb et al., 1994), understanding the “home country bias” phenomenon (Lewis, 1999) and understanding processes underlying comovements between financial and real economies (Brooks et al., 2003), among other issues. Capital market synchronization, along with that of the real economy, is also closely related to the ongoing process of European integration that has been witnessed by stronger real economic linkages and the convergence between old and new European Union (EU) member states (Fidrmuc and Korhonen, 2006).

The strengthening of real economic links has been accompanied by large cross-border capital flows and the deepening of the financial systems in new EU member states in Central and Eastern Europe (CEE). As the ongoing financial market integration in Europe does not seem to have obstacles, the monetary integration of the new EU members is still far from being attainable (Kutan and Orlowski, 2006) despite the fact that financial markets in most developed CEE countries are institutionally advanced (Orlowski, 2005). In this paper we hypothesize that intraday synchronization between developed and emerging European stock markets, as well as among the CEE markets as a group, has been growing, with greater real and financial integration behind the process.

In our analysis we concentrate on comovements among several EU markets during trading hours when the markets are simultaneously opened. We use a multivariate framework, intraday data and a selection of developed as well as emerging European stock markets.

The combination of these differentiates our approach from the literature in the field. Our results show a great degree of intraday synchronization among the old EU markets. On other hand we find very little correlation between the CEE markets and the old EU as well as among the CEE markets themselves.

Time-Varying Synchronization of European Stock Markets