Advertisement

Integration Level and the Hierarchical Structure of European Stock Markets in the Years 2004–2017

  • Elżbieta MajewskaEmail author
Conference paper
Part of the Springer Proceedings in Business and Economics book series (SPBE)

Abstract

The aim of this research is to conduct a dynamic analysis of the level of integration between the European stock markets including their hierarchical structure. The analysis of the structure of links between markets allows identifying those groups of markets that have a particularly strong impact on each other and those with weaker connections. That is an important issue from the point of view of investors as strong links between markets can significantly limit the benefits of internationally diversifying investment portfolios. The study has been carried out with the use of closing prices for 35 main European stock market indices for the time period from September 2014 to August 2017. In the first step, Ward’s method was utilized to analyze the hierarchical structure of the entire set of markets. This allowed to identify groups of markets with the strongest levels of interconnectedness. Next, the level of financial integration was analyzed for the entire group of markets and for smaller subsets of the sample with the use of dynamic integration indicator—calculated as the share of variance explained by the first principal component in the overall variance of the original variables. The indicator was calculated over a moving window. This allowed not only to distinguish groups of markets with higher levels of financial integration but also to identify periods of rising and falling integration.

Keywords

Financial integration Index of integration Hierarchical structure Ward’s method 

Notes

Acknowledgements

This publication has received financial support from the Polish Ministry of Science and Higher Education under subsidy for maintaining the research potential of the Faculty of Mathematics and Informatics, University of Bialystok.

References

  1. 1.
    Al Nasser, O.M., Hajilee, M.: Integration of emerging stock markets with global stock markets. Res. Int. Bus. Finan. 36, 1–12 (2016)Google Scholar
  2. 2.
    Ang, A., Bekaert, G.: International asset allocation under regime switching. Rev. Finan. Stud 15, 1137–1187 (2002)Google Scholar
  3. 3.
    Baele, L., Ferrado, A., Hördahl, P., Krylova, E., Monnet, C.: Measuring financial integration in the euro area. ECB Occasional Paper Series No. 14 (2004)Google Scholar
  4. 4.
    Beine, M., Cosma, A., Vermeulen, R.: The dark side of global integration: increasing tail dependence. J. Bank Finan. 34, 184–192 (2010)Google Scholar
  5. 5.
    Bekaert, G., Harvey, C.R.: Time-varying market integration. J. Finan. 1(2), 403–444 (1995)Google Scholar
  6. 6.
    Bekaert, G., Harvey, C.R., Lumsdaine, R.L.: Dating the integration of world equity markets. J. Financ. Econ. 65, 203–247 (2002)Google Scholar
  7. 7.
    Bekaert, G., Harvey, C.R., Ng, A.: Market integration and contagion. J. Bus. 78(1), 39–69 (2005)Google Scholar
  8. 8.
    Bentes, S.R.: On the integration of financial markets: How strong is the evidence from five international stock markets? Phys. A 429, 205–214 (2015)Google Scholar
  9. 9.
    Boamah, N.A.: The dynamics of the relative global sector effects and contagion in emerging markets equity returns. Res. Int. Bus. Finan. 39, 433–453 (2017)Google Scholar
  10. 10.
    Bonanno, G., Caldarelli, G., Lillo, F., Miccichè, S., Vandewalle, N., Mantegna, R.N.: Networks of equities in financial markets. Eur. Phys. J. B 38, 363–371 (2004)Google Scholar
  11. 11.
    Bordo, M.D., Murshid, A.P.: Globalization and changing patterns in the international transmission in financial markets. J. Int. Money Finan. 25, 655–674 (2006)Google Scholar
  12. 12.
    Brida, J.G., Risso, W.A.: Multidimensional minimal spanning tree: the Dow Jones case. Phys. A 387, 5205–5210 (2008)Google Scholar
  13. 13.
    Briere, M., Chapelle, A., Szafarz, A.: No contagion, only globalization and flight to quality. J. Int. Money Finan. 31(6), 1729–1744 (2012)Google Scholar
  14. 14.
    Büttner, D., Hayo, B.: Determinants of European stock market integration. Econ. Sys. 35, 574–585 (2011)Google Scholar
  15. 15.
    Calinski, T., Harabasz, J.: A dendrite method for cluster analysis. Commun. Stat. 3(1), 1–27 (1974)Google Scholar
  16. 16.
    Campbell, J.Y., Koedijk, K., Kofman, P.: Increased correlation in bear markets. Finan. Anal. J. 58(1), 87–94 (2002)Google Scholar
  17. 17.
    Carrieri, F., Errunza, V., Hogan, K.: Characterizing world market integration through time. J. Finan. Quant. Anal. 42(4), 915–940 (2007)Google Scholar
  18. 18.
    Chen, M.-P., Chen, P.-F., Lee, C.-C.: Frontier stock market integration and the global financial crisis. N. Am. J. Econ. Finan. 29, 84–103 (2014)Google Scholar
  19. 19.
    Chesnay, F., Jondeau, E.: Does correlation between stock returns really increase during turbulent periods? Econ. Notes 30(1), 53–80 (2001)Google Scholar
  20. 20.
    Coelho, R., Gilmore, C.G., Lucey, B., Richmond, P., Hutzler, S.: The evolution of interdependence in world equity markets—evidence from minimum spanning trees. Phys. A 376, 455–466 (2007)Google Scholar
  21. 21.
    Donadelli, M., Paradiso, A.: Is there heterogeneity in financial integration dynamics? Evidence from country and industry emerging market equity indexes. J. Int. Finan. Mark Inst. Money 32, 184–218 (2014)Google Scholar
  22. 22.
    Eryiğit, M., Eryiğit, R.: Network structure of cross-correlations among the world market indices. Phys. A 388, 3551–3562 (2009)Google Scholar
  23. 23.
    Everitt, B.S., Landau, S., Leese, M., Stahl, D.: Cluster analysis. Wiley, Chichester (2011)Google Scholar
  24. 24.
    Ferreira, L., Hitchcock, D.B.: A comparison of hierarchical methods for clustering functional data. Commun. Stat. Simul. C 38(9), 1925–1949 (2009)Google Scholar
  25. 25.
    Forbes, K., Rigobon, R.: No contagion, only interdependence: measuring stock market comovements. J. Finan. 57(5), 2223–2261 (2002)Google Scholar
  26. 26.
    Fratzscher, M.: Financial market integration in Europe: on the effects of EMU on stock markets. Int. J. Finan. Econ. 7(3), 165–194 (2002)Google Scholar
  27. 27.
    Fung, L.K., Tam, C., Yu, I.: Assessing the integration of Asia’s equity and bond markets. BIS Papers No. 42. (2008)Google Scholar
  28. 28.
    Gagnon, J.E., Unferth, M.D.: Is there a world interest rate? J. Int. Money Finan. 14, 846–855 (1995)Google Scholar
  29. 29.
    Gilmore, C.G., Lucey, B.M., Boscia, M.: An ever-closer union? Examining the evolution of linkages of European equity markets via minimum spanning trees. Phys. A 387, 6319–6329 (2008)Google Scholar
  30. 30.
    Gilmore, C.G., Lucey, B.M., McManus, G.M.: The dynamics of Central European equity market comovements. Q. Rev. Econ. Finan. 48, 605–622 (2008)Google Scholar
  31. 31.
    Goetzmann, W.N., Li, L., Rouwenhorst, K.G.: Long–term global market correlations. J. Bus. 78(1), 1–38 (2005)Google Scholar
  32. 32.
    Guidi, F., Ugur, M.: An analysis of South-Eastern European stock markets: evidence on cointegration and portfolio Diversification Benefits. J. Int. Finan. Mark I 30, 119–136 (2014)Google Scholar
  33. 33.
    Hardouvelis, G.A., Malliaropulos, D., Priestley, R.: EMU and European stock market integration. J. Bus. 79(1), 365–392 (2006)Google Scholar
  34. 34.
    Hossen, B., Siraj-Ud-Doulah, Hoque A.: Methods for evaluating agglomerative hierarchical clustering for gene expression data: a comparative study. Comput. Biol. Bioinform. 3(6), 88–94 (2015)Google Scholar
  35. 35.
    Jennrich, R.I.: An asymptotic chi-square test for the equality of two correlation matrices. J. Am. Stat. Assoc. 65(330), 904–912 (1970)Google Scholar
  36. 36.
    Jolliffe, I.T.: Principal component analysis. Springer series in statistics, 2nd edn. Springer, New York (2002)Google Scholar
  37. 37.
    Kenourgios, D., Samitas, A.: Equity market integration in emerging Balkan markets. Res. Int. Bus. Finan. 25, 296–307 (2011)Google Scholar
  38. 38.
    Kizys, R., Pierdzioch, C.: The financial crisis and the stock markets of the CEE countries. Finan. Uver 61(2), 153–172 (2011)Google Scholar
  39. 39.
    Larntz, K., Perlman, M.D.: A simple test for the equality of correlation matrices. Technical Report No. 63, Department of Statistics, University of Washington (1985)Google Scholar
  40. 40.
    Lehkonen, H.: Stock market integration and the global financial crisis. Rev. Finan. 19(5), 2039–2094 (2015)Google Scholar
  41. 41.
    Leon, C., Kim, G.-Y., Martinez, C., Lee, D.: Equity markets’ clustering and the global financial crises. Borradores de Economia 937 (2016)Google Scholar
  42. 42.
    Longin, F., Solnik, B.: Is the correlation in international equity returns constant: 1960–1990? J. Int. Money Finan. 14(1), 3–26 (1995)Google Scholar
  43. 43.
    Longin, F., Solnik, B.: Extreme correlation of international equity markets. J. Finan. 56(2), 649–676 (2001)Google Scholar
  44. 44.
    Majewska, E.: Impact of 2007–2009 financial crisis on hierarchical structure of European capital markets. Optimum. Econ. Stud. 3(87), 61–76 (2017). (in polish)Google Scholar
  45. 45.
    Majewska, E., Jamróz, P.: Integration measures based on principal component analysis: Example of eurozone stock markets. In: Tsounis N, Vlachvei A (eds) Advances in time series data methods in applied economic research—Proceedings of the 2018 International Conference on Applied Economics (ICOAE). Springer Proceedings in Business and Economics (in press) (2018)Google Scholar
  46. 46.
    Majewska, E., Olbrys, J.: Measuring dynamics of financial integration on the euro area stock markets, 2000–2010. In: Tsounis N, Vlachvei A (eds) Advances in panel data analysis in applied economic research—Proceedings of the 2017 International Conference on Applied Economics (ICOAE). Springer Proceedings in Business and Economics, pp, 129–142 (2018)Google Scholar
  47. 47.
    Mantegna, R.N.: Hierarchical structure in financial markets. Eur. Phys. J. B 11, 193–197 (1999)Google Scholar
  48. 48.
    Marti, G., Andler, S., Nielsen, F., Donnat, P.: Clustering financial time series: how long is enough? In: Proceedings of the Twenty-Fifth International Joint Conference on Artifical Intelligence, pp. 2583–2589 (2016)Google Scholar
  49. 49.
    Mauro, P., Sussman, N., Yafeh, Y.: Emerging market spreads: then versus now. Q. J. Econ 117, 695–733 (2002)Google Scholar
  50. 50.
    Nellis, J.G.: A principal components analysis of international financial integration under fixed and floating exchange rate regimes. Appl. Econ. 14, 339–354 (1982)Google Scholar
  51. 51.
    Oanea, D.-C.: Financial Markets Integration: a vector error-correction approach. J. Econ. Asymmetries 12, 153–161 (2015)Google Scholar
  52. 52.
    Olbrys, J., Majewska, E.: The 2007–2009 financial crisis on emerging markets: quantitative identification of crisis in continent-based regions. Chinese Bus. Rev. 13(7), 411–426 (2014)Google Scholar
  53. 53.
    Olbryś, J., Majewska, E.: Testing integration effects between the CEE and U.S. stock markets during the 2007–2009 Global Financial Crisis. Folia Oecon Stetin 14(1), 101–113 (2015)Google Scholar
  54. 54.
    Olbryś, J., Majewska, E.: Increasing cross-market correlations during the 2007–2009 financial crisis: contagion or integration effects? Arg. Oecon. 39(2), 263–278 (2017)Google Scholar
  55. 55.
    Onnela, J.-P., Chakraborti, A., Kaski, K., Kertész, J., Kanto, A.: Asset trees and asset graphs in financial markets. Phys. Scripta. T106, 48–54 (2003)Google Scholar
  56. 56.
    Oprea, O.R.: Financial Integration and Financial Contagion, a Problem for Financial Stability? J. Publ. ADM Financ. Law 11, 121–136 (2017)Google Scholar
  57. 57.
    Panton, D.B., Lessing, P., Joy, O.M.: Comovement of international equity markets: a taxonomic approach. J. Financ. Quant. Anal. 11(5), 415–432 (1976)Google Scholar
  58. 58.
    Peša, A.R., Wrońska-Bukalska, E., Bosna, J.: ARDL panel estimation of stock market indices and macroeconomic environment of CEE and SEE countries in the last decade of transition. Port. Econ. J. 16, 205–221 (2017)Google Scholar
  59. 59.
    Pukthuanthong, K., Roll, R.: Global market integration: an alternative measure and its application. J. Financ. Econ. 94, 214–232 (2009)Google Scholar
  60. 60.
    Quinn, D.P., Voth, H.-J.: A century of global equity market correlations. Am Econ Rev: Papers Proc. 98(2), 535–540 (2008)Google Scholar
  61. 61.
    Sandoval, L.: Pruning a minimum spanning tree. Phys. A 391, 2678–2711 (2012)Google Scholar
  62. 62.
    Sandoval, L.: Cluster formation and evolution in networks of financial market indices. Algorithmic Financ. 2(1), 3–43 (2013)Google Scholar
  63. 63.
    Schotman, P.C., Zalewska, A.: Non-synchronous trading and testing for market integration in Central European emerging markets. J. Empir. Financ. 13, 462–494 (2006)Google Scholar
  64. 64.
    Sensoy, A., Yuksel, S., Erturk, M.: Analysis of cross-correlations between financial markets after 2008 crisis. Phys. A 392, 5027–5045 (2013)Google Scholar
  65. 65.
    Volosovych, V.: Measuring financial market integration over the long run: is there a U-shape? J. Int. Money Financ. 30, 1535–1561 (2011)Google Scholar
  66. 66.
    Volosovych, V.: Learning about financial market integration from principal components analysis. CESifo Econ Stud 59(2), 360–391 (2013)Google Scholar
  67. 67.
    Voronkova, S.: Equity market integration in Central European emerging markets: A cointegration analysis with shifting regimes. Int. Rev. Financ. Anal. 13, 633–647 (2004)Google Scholar
  68. 68.
    Ward, J.H.: Hierarchical grouping to optimize an objective function. J. Am. Stat. Assoc. 58(301), 236–444 (1963)Google Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  1. 1.University of BialystokBiałystokPoland

Personalised recommendations