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The Dynamics of Central European Equity Market Integration

This paper examines bilateral and multilateral cointegration properties of the German stock market and those of the three major Central European countries which recently attained membership in the European Union. Cointegration tests cover the time period of July 6, 1995 to February 10, 2005. Additional techniques are also applied to provide further information concerning the dynamic evolution of the integration process during this period. Application of the Johansen (1988) cointegration procedure indicates that, contrary to results for an earlier time period there is evidence of an emerging long-term relationship between the German and UK markets and the Czech market, as well as cointegration within the group of Central European markets. We also apply the Haldane and Hall convergence analysis, in an effort to determine the extent to which these markets are converging to London or Frankfurt. Overall, the results suggest that the process of integration of the Central European countries into the EU is leading to a closer integration of their equity markets with those of major EU countries.