The Core, Periphery, and Beyond: Stock Market Comovements among EU and Non‐EU Countries

Date01 February 2019
Published date01 February 2019
The Financial Review 54 (2019) 5–56
The Core, Periphery, and Beyond: Stock
Market Comovements among EU and
Non-EU Countries
Michael A. Goldstein
Babson College
Joseph McCarthy
Bryant University
Alexei G. Orlov
U.S. Securities and Exchange Commission
Using linear and nonlinear correlations, copulas, quantile dependence and lower tail
dependence, we find that (1) equity markets of the advanced European Union (EU) countries
comove more closely with each other than with the peripheral economies, (2) comovements
with non-EU countries are lower, (3) relative comovement structure before, during, and after
the global financial crisis has been very stable, and (4) the level of comovements remained
virtually the same between the crisis and post-crisis periods. Our results are robust to controlling
Corresponding author: U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549; Phone: 202-551-6434; E-mail:
We thank conference participants at the 2016 Financial Management Association and our discussant
Fernando Moreira, and two anonymous referees for immensely helpful comments. Wealso thank Andrew
Patton and James P. LeSage for sharing their MATLAB codes for computing quantile dependence. The
authors of this paper are responsible for any errors oromissions. The Securities and Exchange Commission,
as a matter of policy, disclaims responsibility for any private publication or statement by any of its
employees. The views expressed herein are those of the authors and do not necessarily reflect the views
of the Commission or the authors’ colleagues on the staff of the Commission.
C2019 The Eastern Finance Association 5
6M. A. Goldstein et al./The Financial Review 54 (2019) 5–56
for Fama-French, U.S. and global risk factors, as well as monetary policy,market interest rates,
exchange rates, and uncertainty.
Keywords: financial interdependence, comovements, European stock markets, PIIGS, Brexit,
copulas, global financial crisis
JEL Classifications: C14, F30, F37, G10, G15
1. Introduction
The vote in the United Kingdom (UK) on June 23, 2016, to leave the European
Union (EU) raised a variety of questions, including how and what EU membership
affects. Although the UK’s exit from the EU will affect a variety of trade and immi-
gration issues, the Brexit vote (see, e.g., The Economist, 2016) also raises interesting
questions about how Eurozone and EU membership affects comovements across not
just the labor and goods markets but financial markets as well. This is especially
pertinent since the UK is (still) a member of the EU but did not adopt the euro as
its currency, unlike many other EU members such as Germany and France. As eq-
uity markets tend to aggregate the effects of goods, labor, foreign exchange, interest
rates and capital markets, an important question is how EU membership (and non-
membership) affects equity market comovements among advanced and nonadvanced
economies. Compounding these issues was the adoption of the euro as a common
currency on January 1, 1999, which removed some diversification effects due to
currency movements across Eurozone countries. Even so, notable differences remain
across countries that use the euro.
In this paper, we examine the interrelationships among the core and periphery
EU and Eurozone countries, and those of the UK and beyond. We try to answer three
main research questions. First, how are comovements among European stock markets
affected by the EU affiliation versus adoption of the euro? Second, do the European
periphery economies’ stock markets comove more or less with each other than with
the stock markets of the core European countries? Third, how does the structure of
stock market comovements change between tranquil and crisis periods?
Overall, we find that the core EU and Eurozone countries comovemore with each
other than any other group, and that the periphery EU and Eurozone countries comove
more with the core than with each other. As the use of the euro and membership in the
EU is removed, the stock market comovements become reduced. Interestingly, using
a variety of statistical techniques, we find that the relative structure of comovements
across countries prior to the crisis remained relatively constant before, during, and
after the crisis. Notably,the absolute magnitude of the comovements increased during
the financial crisis but did not diminish after the crisis. These effects continued to
hold even after controlling for macroeconomic effects, Fama-French risk factors, or
market controls as in Bekaert, Ehrmann, Fratzscher and Mehl (2014).
M. A. Goldstein et al./The Financial Review 54 (2019) 5–56 7
This study contributes to two closely related strands of the literature—financial
markets comovements and financial contagion (e.g., King and Wadhwani, 1990;
Morck, Yeung and Yu, 2000; Kodres and Pritsker, 2002; Baele, 2005; Bekaert, Har-
vey and Ng, 2005; Bekaert, Hodrick and Zhang, 2009; Mendoza and Quadrini, 2010;
Christoffersen, Errunza, Jacobs and Langlois, 2012; Bekaert, Ehrmann, Fratzscher
and Mehl, 2014; Dungey and Gajurel, 2014; Caporin, Pelizzon, Ravazzolo and
Rigobon, 2018). Although Solnik (1974) suggests that international investing adds
substantial diversification benefits, more recent works by Chollete, de la Pe˜
na and
Lu (2011), Christoffersen, Errunza, Jacobs and Langlois (2012), Fern´
Montero and Orlov (2012), and others note that comovements in financial markets
notably reduce the benefits of diversification. Aloui, A¨
ıssa and Nguyen (2011) state
that “correlations of global stock returns have increased in the recent periods as a
result of increasing financial integration, leading to lower diversification benefits
especially in the longer term” (p. 130), and note that “[a] number of past studies have
reported the existence of significant linkages both between emerging and developed
markets, and among emerging markets” (p. 131, emphases added). At the same time,
recent events tied to the global financial crisis have affected different economies to
differing degrees. These events have particularly affected highly indebted countries
such as Portugal, Ireland, Italy, Greece and Spain (PIIGS) that were at the center
of the Eurozone debt crisis, as compared with more developed economies such as
France, Germany and the UK or the non-EU countries of Switzerland, South Africa,
Japan and the United States.1
To examine these cross-country differences, we start with two core EU and
Eurozone economies—France and Germany—and expand the sample by building
concentric circles outward. We include five EU peripheral countries that adopted
the euro—PIIGS—then expand to the UK, which is part of the EU but does not
use the euro, and Switzerland, a European nation that is neither in the EU nor in
the Eurozone but share languages and is contiguous with both France and Germany.
We further expand our circle geographically to include (1) the United States, a G7
common-law country culturally similar to the UK, (2) South Africa, another common-
law country culturally similar to the UK but smaller and likewise geographically
distant, and (3) Japan, another large G7 country distant from the rest of the sample.
This set of countries differ by EU and euro adoption as well as geographically,
culturally, and by market size.2We then use multiple statistical methods—from
1All of the PIIGS economies share an important feature that separates them from countries such as France
or Germany—namely, high debt-to-gross domestic product (GDP) ratios, which manifested in domestic
macroeconomic problems and which became a concern for other European economies. The data that we
analyze support our categorization: stock market indices for Germany,France and the UK are at or above
the Eurozone index (described in detail in Section 3), whereas Italy,Spain and the other PIIGS economies
are distinctly below.
2Chui, Titman and Wei(2010) and many others examine the link between culture and international stock
market returns.

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