Analyzing Long-Term Dynamic Causal Linkages and Financial Integration Between the Capital Markets in Romania and Hungary

Analyzing Long-Term Dynamic Causal Linkages and Financial Integration Between the Capital Markets in Romania and Hungary

DOI: 10.4018/978-1-5225-9269-3.ch010


This chapter aims to investigate long-term dynamic causal linkages between stock markets in Hungary and Romania in order to obtain additional benefits based on international portfolio diversification, especially in terms of globalization. Emerging stock markets are generally considered to be more attractive for both institutional and individual financial investors due to certain stylized facts. The volatility transmission patterns, financial contagion effects, international interdependence and long-run causal linkages between international stock markets highlight the importance of a functional and stable financial environment. Technically, the structure of this subchapter includes both theoretical developments and additional empirical results. Moreover, the empirical analysis provides a quantitative perspective on global interdependencies between Romania and Hungary.
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As an element of originality, this subchapter includes two distinct empirical analyzes, which is differentiated by both financial series as well as through selected stock market indices. According to Birau and Antonescu (2014), the econometric analysis is based on daily returns of selected stock markets major indices during the sample period between January 2000 and January 2014. The financial econometrics framework includes descriptive statistics, Unit Root Test, Augmented Dickey-Fuller stationary test, BDS test and Granger causality test. The final results of this empirical study are highly relevant in order to understand investment decision making process and stock market stability.

The bilateral relationship between Romania and Hungary has proved to be very complex and somewhat unstable based on the disputes concerning institutional, cultural and territorial autonomy. Romania's national minorities comprise a fairly heterogeneous structure, which have potentially significant direct impact on the economic and financial field. According to the National Institute of Statistics (INSSE) based on the final results of the Population and Housing Census conducted in 2011, the Hungarian minority of Romania is represented by a significant number of 1.259.914 people and consisting in a proportion of about 6,26148% of the total population (20.121.641). Moreover, ethnic Hungarians constitute the largest ethnic minority in Romania. Nevertheless, from peaceful coexistence to recurrent bilateral tensions is more than a political issue. One of the most significant aspect is the fact that the fundamental practice of bilateral agreements based on good relations between neighboring countries is considerable influencing the economic environment. Nevertheless, the foreign relations between Romania and Hungary have deep historical roots, with profound economic implications, especially in terms of globalization.

Romania and Hungary are two member states of the European Union but reveals different levels of socio-economic development. Hungary and Romania are neighbors and have a common history in some respects. On the other hand, Hungary joined the European Union (EU) in 2004 and Romania became a member in 2007. The Hungarian community in Romania is particularly significant in some counties in Transylvania such as Harghita and Covasna. Moreover, according to the official statistics of World Bank on Romania provided in April 2017, the share of Romanians at risk of poverty after social transfers increased from 22.9% in 2012 to 25.4% in 2015, while the share of the population at risk of poverty and social exclusion decreased from 43.2% in 2012 to 37.4% in 2015.

Certainly, Hungary has more attractive economic prospects. However, in recent years, political tensions and austerity measures have caused a negative influence in terms of investor confidence, especially in Romania. Consequently, the economic context is more favorable for Hungary considering a wide range of influential factors. In recent past, the Hungarian economy managed to achieve much higher levels of development even better than expected. The influence of the real economy is reflected in the field of financial investments. Furthermore, economic growth and financial stability are mutually reinforcing especially in terms of international integration.

According to FTSE Country Classifications, data provided on March 2017, Hungary is included in the category of advanced emerging markets, while Romania is included in the category of frontier markets. Moreover, the main categories provided by FTSE Country Classifications are the following: developed, advanced emerging, secondary emerging and frontier. Concretely, Bucharest Stock Exchange (Romania) is a frontier market and Budapest Stock Exchange is an advanced emerging market (Hungary). In recent decades, there has been an important structural reform of international stock markets based on cross-border transactions, exchange control, investment policy non-restrictions, derivatives, international portfolio diversification, liberalization of financial operations (Birau & Trivedi, 2013). Moreover, emerging capital markets are less efficient than the developed markets considering their long-term structural imbalances, periodic cycles of significant contractions and expansions, asymmetric volatility effects, informational frictions, along with severe functional disturbances.

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