Journal of Economics and Finance

, Volume 38, Issue 1, pp 1–26

Euro conversion and return dynamics of European financial markets: a frequency domain approach

  • Axel Grossmann
  • Emiliano Giudici
  • Marc William Simpson
Article

DOI: 10.1007/s12197-011-9204-9

Cite this article as:
Grossmann, A., Giudici, E. & Simpson, M.W. J Econ Finan (2014) 38: 1. doi:10.1007/s12197-011-9204-9
  • 172 Downloads

Abstract

Using a frequency domain approach, we compare the spectra of equity market index returns for the 12 Euro-zone countries, the UK, the US, and Japan, over several time frames before and after the introduction of the Euro. In the immediate aftermath of the Euro-introduction, we find a reduced volatility over all frequencies, in which no strong cyclical components are present. However, in the long run, equity markets exhibit a volatility increase: the larger European equity markets develop dynamics that exhibit strikingly similar patterns, while the smaller European equity markets appear to follow dynamics closely resembling white noise. The similarity in dynamics is a likely candidate to explain the increase in correlation among the European markets. Furthermore, the European equity markets initially exhibited dynamics that resembled those of the US, while after the introduction of the Euro, the dynamics of the European Markets exhibits patterns similar to those found the UK. This suggests a change in the dynamic interdependency between the UK and the European markets and an increased convergence of UK market behavior with that behavior dominant in the Euro-zone. The findings may provide important implications for investors seeking to take advantage of international diversification.

Keywords

Euro-IntroductionReturn DynamicsCorrelationTime-Varying Frequency Domain

JEL Classification

F3G1

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Axel Grossmann
    • 1
  • Emiliano Giudici
    • 2
  • Marc William Simpson
    • 3
  1. 1.Department of Accounting, Finance and Business LawRadford UniversityRadfordUSA
  2. 2.Department of Economics & FinanceStephen F. Austin State UniversityNacogdochesUSA
  3. 3.Department of FinanceNorthern Illinois UniversityDeKalbUSA