Abstract:

Portugal, Italy, Greece, Spain and Ireland are the European countries having similar economic environments. Since the European sovereign debt crisis, they have been referred to as a group of European economies facing particular financial crisis. This study, first, tests the interdependence of these countries’ stock markets and Turkey in a period covering both global financial crises and European sovereign debt crisis. Secondly, it uses GARCH(1,1), IGARCH(1,1) and EGARCH(1,1) models to examine the index return volatilities. Thirdly, it applies a gravity model to determine the effects of variables such as the distance between stock markets and the size of markets on the correlation coefficient between returns. Using data from March 2005 to December 2011, we examine the stock market indexes of Portugal, Italy, Greece, Spain, Ireland and Turkey. The index level series are non-stationary and hence we employ co-integration analysis to model the interdependencies. The results of the co-integration tests indicate that there is no long-run relationship between the stock markets. There is only one co-integrating vector which appears to explain the dependencies in prices between Greece and Turkey. Our results suggest that there is a potential for diversifying risk as they are not integrated. We find strong evidence of time-varying volatility and volatilities show high persistence. The results of gravity model indicate that the distance between stock markets and the size of markets have significant effects on the correlation of returns between Turkish stock market and the other countries while neighborhood does not.

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