Modelling change in financial market integration

Vol: 
07/2009
Author name: 
Aslanides N
Dungey M
Savva CS
Year: 
2009
Month: 
January
Abstract: 

This paper measures the increase in stock market integration between the three largest new EU members (Hungary, the Czech Republic and Poland) and the Euro-zone. To achieve this we develop a new model where smooth transition conditional correlation (STCC) models with fat tails, spillovers, volatility clustering, and asymmetric volatility effects (GJRGARCH) are embedded in a single VAR. The specification is directly compared the dynamic conditional correlation (DCC) model of Engle (2002). The results show evidence of financial integration with the EMU in each of the three countries with a considerable increase in correlations in 2006. Tests for a common transition structure of the three markets with the Euro-zone are rejected, due to the differing behaviour of the Czech Republic data.

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