Investigating International Causal Linkages Between Latin European Stock Markets in Terms of Global Financial Crisis: A Case Study for Romania, Spain, and Italy

Investigating International Causal Linkages Between Latin European Stock Markets in Terms of Global Financial Crisis: A Case Study for Romania, Spain, and Italy

DOI: 10.4018/978-1-5225-9269-3.ch012

Abstract

The main objective of this chapter is to investigate international causal linkages between selected Latin European stock markets, such as Romania, Spain, and Italy, in terms of global financial crises. Moreover, the structure of this book chapter includes both theoretical developments and new empirical findings. In recent past, the global phenomenon of increasing cointegration, co-movements and financial contagion patterns between developed and emerging stock markets have significantly influenced foreign investment behavior. The global financial crisis has seriously affected the international financial architecture and global economic stability due to unprecedented dynamic financial contractions. In addition, as strictly economic approach, Romanian labor migration is very high level in Italy and Spain. On the other hand, financial integration and the international causal linkages suggest a certain behavioral pattern between receiving societies. The financial econometrics approach includes various tools such as Unit Root Test, Hodrick-Prescott (HP) filter, Augmented Dickey-Fuller stationary test, BDS test and Granger causality test. The final results provide a comprehensive framework regarding international portfolio diversification, risk management and strategic investment decision making process.
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Literature Review

The global financial crisis that erupted in mid-2007 in U.S.A. triggered dramatic consequences for most of stock markets across the world. An extreme financial phenomenon does not follow a historical pattern so it is very difficult to predict with high accuracy. According to Birau (2014a) various stock crashes followed by severe financial crisis occurred rather frequently in the last century and sometimes reaching global magnitude, such as: the Great Depression between the years 1929-1933, Latin American financial debt crisis of the 1980s, Black Monday (Black Monday) in 1987, the Asian financial crisis of 1997 – 1998, Russian financial crisis or Ruble crisis in 1998, DOTCOM bubble during 2000 and 2002 and the Subprime crisis that erupted in August 2007 in U.S.A.

Eun and Shim (1989) empirically analyzed the interdependence structure of major national stock markets. Moreover, the authors suggested that innovations in U.S. market are suddenly transmitted to other stock markets despite the fact that none of these markets can adequately justify its movements. They investigated the existence of international transmission of stock market movements among several mature markets, such as: Australia, Japan, Hong Kong, U.K, Switzerland, France, Germany, Canada and U.S.A. Moreover, Abimanyu et. all (2008) investigated the international linkages of the Indonesian capital market using cointegration tests to examine the long-run equilibrium relationship between the stock markets of Indonesia with China, France, Germany, Hong Kong, Japan, Korea, Malaysia, Netherlands, Philippine, Singapore, Thailand, Taiwan, the United Kingdom and the United States.

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