Three papers on European financial market integration

Abstract

This thesis comprises three papers that use GARCH modelling techniques to examine volatility spillover effects for cross-listings across markets with different regulatory structures. The first paper examines the integration process for cross-listed equities in Europe. A primary focus of this study is to examine the volatility spillover effects for cross-listings across markets with different regulatory structures. Overall we find that spillover effects are important both within and across
European markets for cross-listed companies. The magnitude and persistence of these information spillovers varies according to the dynamics of such relationships. The second part of the paper investigates the relationship between spillover effects and stock market regulatory structures for crosslisted European firms in more detail. Using LaPorta et al.'s (1998) stock exchange regulatory classification (that distinguishes between differences in capital market accounting disclosure rules, and shareholder and creditor protection regulations) we identify firms that have cross-listed on exchangeswith either higher, lower or similar regulatory features compared with their home market listing. We also find that different regulatory environments have a significant impact on volatility spillovers. Fundamental factors, such as the level of interest rates and trading volume, positively impact on the magnitude and persistence of these spillovers. The second paper develops the approach suggested by Karolyi (1995), Longin and Solnik (1995), and Karolyi and Stulz (1996) to examine the impact of futures variables (such as currency, exchange rates, treasury bills, treasury bonds, and stock indices) and asymmetric and threshold effects on the integration process for cross-listed equities in Europe. We find that futures variables have a significant impact on the magnitude and persistence of volatility spillovers between markets. On average, we do not find the impact of small and bad news (on volatility spillovers) differ compared with that of large and positive news. Again, we also find that regulatory differences between markets can influence volatility transmission patterns.
The third paper develops the approach suggested by Howe, Madura and Tucker (1993) to examine the impact of cross-listing on stock price volatility in Europe. A primary focus of this paper is to provide a different methodology from Howe, Madura and Tucker (1993), using a modified GARCH modelling approach as suggested by Li and Engle ( 1998), to examine the impact of cross-listings on volatility spillovers. The aim here is to examine both symmetric and asymmetric information spillover effects from foreign equities (at the time of listing) to the home equities. Overall, we find that information spillover effects (with or without asymmetries) are important across European markets for cross-listed
equities and that different regulatory environments have a significant impact on information spillovers. The magnitude and persistence of these information spillovers varies according to the location of crosslistings as indicated by results obtained from GARCH modelling approaches.

Date of Award	Jan 2003
Original language	English
Awarding Institution	University of Wales, Bangor