The degree of integration of the Bulgarian and Croatian equity markets into the Eurozone share equity market

Abstract

PURPOSE: This paper attempts to answer the question to what degree the equity markets of two countries aspiring to join the eurozone are integrated into the zone’s share exchange market.

DESIGN/METHODOLOGY/APPROACH: An econometric model based on the model of increased impact of the common news component on stock market yields by means of GARCH is applied to the analysis of the degree of integration of the Bulgarian and Croatian equity markets into the eurozone equity market. Monthly data on the yields on CROBEX (Croatia), SOFIX (Bulgaria), DJ EUROSTOXX (the euro area), DJ COMPOSITE AVERAGE (the United States) are used.

FINDINGS: Both the Bulgarian and Croatian equity markets are integrated into the eurozone equity market to a low degree, which means idiosyncratic shocks play a dominant role in determining yields on the indices in these countries.

PRACTICAL IMPLICATIONS: The results presented in this paper can be employed by economists, politicians, and business practitioners who deal with the integration of financial markets including equity markets.

ORIGINALITY/VALUE: This study addresses two countries that are aspiring and closest to joining the eurozone, hence research into the degree of integration of the equity markets of both these countries into the eurozone market is important.