A Study on the Integration of Stock Markets in Europe: Based on GARCH Estimation

This study investigates financial integration of European countries based on the interdependence among nine national stock markets during the period 2000-2013. The extent of integration of stock markets over time is tested by dividing the fourteen-year period into two periods of seven years. The results show that the stock markets in Europe are highly correlated with each other and correlation among the stock markets has more strengthened in later period than earlier period. No differences in interdependence are found between euro area and non-euro area stock markets. Among the nine stock markets German market is the most influential market in terms of Granger causality while French influence fades away. As for spillover effect from external stock markets, Return spillover from German market is diminished in later seven years of period. Volatility of European stock markets is largely dependent on its own shock while the outside markets, which represent European average return, German, British and French market returns, contribute in the volatility of some markets or do not contribute in other markets. Stock investment risk can be reduced by portfolio diversification based on this study to support the Christian stock investment in the sense that the reason behind opposing Christian stock investment is that stock investment pursues unearned income and involves too much risk.