Nordic Financial Market Integration: An Analysis with GARCH Modeling

Abstract

This thesis investigates the financial integration of the Nordic stock markets by studying the return-spillover effects across countries. Three related hypotheses are addressed. Firstly, the increasingly documented dominance of the EMU market over the US market is assumed to apply for the Nordic countries. Secondly, the non-EMU members are expected to be more integrated with each other than with the Finnish participating country. Corresponding expectations of a higher and exclusive integration of Finland with the EMU than with any of the Nordic markets are formed. Thirdly, the Euro introduction is assumed to have had a significant impact on the integration of all the Nordic markets. Using a GARCH(1,1) model, we analyze the degree and evolution through time of integration between the Nordic stock markets. It is found that the first hypothesis cannot be rejected as the EMU is the dominant market for the Nordic countries. The second hypothesis cannot be rejected for Denmark and Norway. Sweden is found to be more integrated with Finland than with Denmark and Norway. Finally, the third hypothesis is rejected as there is evidence that financial market integration in the Nordic region has not been significantly influenced by the European unification process.