Interdependence between Nordic stock markets and financial cooperation

Abstract

Purpose

This study aims to link the financial cooperation in the Nordic region and the interdependence between the stock markets in this area. The main emphasis is placed on the evolution of this interdependence as the financial integration was proceeding.

Design/methodology/approach

Johansen’s cointegration technique and the exponential generalized autoregressive conditionally heteroskedastic model are applied to test the long-run and short-run interdependences, respectively, among Nordic stock markets. In particular, the recursive estimation approach is used to reveal the evolution of the interdependence between those markets.

Findings

The existence of two cointegrations over the sample period indicates that the markets depend on each other to some extent. The recursive estimation of Johansen’s model further reveals that the interdependence had been greatly improving until late 2008. The interdependence between those markets is also confirmed convincingly by the short-term dynamics, noting that the spillover effects between most pairs of stock volatilities are witnessed in the empirical results.

Practical implications

The findings show the dynamics of the long-run correlations between the Nordic stock markets, which imply the intrinsic response to the process of financial market reforms, the 2008 global financial crisis and the period after the crisis. The evidenced information about determinants of the interdependence between Nordic stock markets is sending strong signals to investors to enhance their investment strategies.

Originality/value

Most of the existing studies have been restricted to the static long-run and/or short-run interdependence among those markets. However, this study contributes to the literature by investigating the dynamics of interdependence among the Nordic stock markets over time; moreover, the evolution of the market interdependence is sketched closely to the process of the regional financial market reforms.

Citation

Dengjun, Z. (2015), "Interdependence between Nordic stock markets and financial cooperation", Review of Accounting and Finance, Vol. 14 No. 2, pp. 172-188. https://doi.org/10.1108/RAF-03-2013-0036