The more the Merrier? The reaction of euro area stock markets to new members

Abstract

The adoption of the euro is a crucial turning point for the economy of any EU member and the culmination of a long process of exchange rate management and macroeconomic convergence. But how does the prospect of euro area enlargement play out in the countries that have already adopted the euro? Are new members seen as a way to expand the club of like-minded countries, or are they perceived as a threat to stability, either because there exists a moral hazard risk from the side of old members to adopt riskier behavior on behalf of new members or vice versa? This paper looks at the effects of the news of the euro's adoption event in new members on the stock returns of nineteen euro area countries, employing both an event study methodology and APARCH modeling to capture and test the form of responses of European financial market volatility. Our results show that markets were indeed pleased when new members joined the euro area, with negative responses due solely to local conditions rather than euro area-wide travails. In our most interesting finding, the expansion of the euro actually helped to dampen local market volatility in the post-crisis period in the founding member states, while euro adoption quelled volatility both pre-and post-crisis for non-founding members.

Integration in Central European capital markets in the context of the global COVID-19 pandemic

“…Global pandemic has been examined also in the context of individual stock markets, such as the London Stock Exchange (Griffith et al, 2020), or through qualitative research methods such as crisis management, at the company or industry level in Italy (Rapaccini et al, 2020). Other authors, like Grigaliuniene et al (2020) studied capital markets in a crisis period, namely the post-crisis effect of the recent financial crisis. Through the APARCH modelling methodology they show that the expansion of the euro within the monetary union has helped to dampen local market volatility in the post-crisis period in the Member States.…”