STOCK EXCHANGE MARKETS INTEGRATION A CAUSE OF QUASI – [613153]

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STOCK EXCHANGE MARKETS INTEGRATION – A CAUSE OF QUASI –
SIMULTANEOUS TRANSMISSION OF FINANCIAL CRISIS

Sabău -Popa Claudia Diana
University Oradea, Faculty of Economic Sciences Oradea, str. Universității no. 1, [anonimizat],
[anonimizat]

Financial mondialization designate the enlargement movement and the opening of ca pital markets at a
global level which began at the beginning of the ´70s. Because of the capital markets integration, the
economies are more and more exposed to the common impacts which have as result the global dimension
crises. Several examples confirm t he quasi -simultaneous reaction of all stock exchange markets during the
crisis period. Even if the markets have lost of their materiality, there still remain major financial centers
and their integration appears, first of all, through the simultaneous evol ution of stock exchange indexes.
This synchronization reflects the high interdependence of the economies, both during the crises period and
during the calm periods.

Keywords: stock exchange indexes, stock exchange markets integration, contagion phenomenon , financial
crisis

Classification JEL: G15, F36

The evolution of stock exchange indexes of the main capital markets (Frankfurt, Lond on, New
York, Paris and Tokyo) represents one of the best way of illustration of financial mondialization,
the increase an d decrease phases coinciding almost perfectly.
Other indexes also show a quick consolidation of the interdependence between the national stock
exchanges. The markets liberalization and the new technologies of information and
communication have very much f avoured the integration of stock exchange markets. Instead, the
consequences of these integrations raise some questions whose answers are less peremptory. The
enlargement and the opening of the markets supported the competition between the stock
exchange markets, some stock exchange markets melting in order to maintain their dominatory
position338.
Two factors have played a major role in the powerful integration of the international stock
exchange markets since the beginning of the ´80s: the change of the f inancial area and the
development of the new technology of information and communication.
The change of the financial area, which began in the ´70s in the Ang lo-Saxon countries, may be
described briefly by the formula of ˝3D -s phenomenon˝339, that is, disintermediation, deregulation
and discompartmenting . The evolution of financial systems was actually marked by a strong
development of the stock exchange markets , a liberalization of them and a wide opening which
even though didn´t eliminate all the barriers.
The enlargement of the new technologies of information and communication also permitted a
strong lower of the transaction costs and facilitated the title exc hanges at international level and
the portofolios diversification. At the same time, the developement of the international investors
and their implication at a higher level in portofolio investments abroad, desiring the
diversification of the placements le ad to the increase of capital markets integration. In 1970, the
foreign actives owned by the residents of the USA represented about 6% of the U.S. capital
stock, and the non -residents had 4% of this stock. In 2006, these figures were of 44%,
respectively 5 6%.

338 Gunther Capelle -Blancard & Jézabel Couppey – Soubeyran L′intégration des marchés boursiers ,Ques tions
internationales no34 November -December 2008, La Documentation Française, p. 43
339 The formula belongs to Henri Bourguinat.

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The most visible example of the stock exchange integration is the fusion from 2000 between the
Stock Exchanges from Amsterdam, Bruxelles and Paris, in view of the creation of the first
paneuropean stock exchange: Euronext, and it was for the first time in the world that three stock
exchanges from different countries merged. Then, in 2001, this merged with the Portuguese stock
exchange and the main market of derived products from London (LIFFE). In 2007, Euronext
merged with New York Stock Exchange, form ing NYSE -Euronext , the first world stock
exchange group. The new society named NYSE Euronext is a holding society with American
right, having its American headquarter in New York and its European headquarter both in Paris
and Amsterdam, London representing the center for the activities on the financial derivatives
markets.
NYSE – Euronext is a stock exchange capitalization of about 20 billion USD (15 billion euro)
and the value of all societies coted to the new platform is about 27.000 billion USD (21.000
billion euro). Each part directly implied: operators, coted societies and investors benefit by this
fusion:
-The operators have the advantage of using a completely integrated system of negociation and
liquidation, modern and reliable;
-The investors benef it by an increase of liquidities and transparency, a unique regulating
framework, the cotation in one currency on several markets, the decrease of transaction costs;
-The societies coted on the new markets have as advantage the unification of the regulatio ns, the
increase of the potential investors, the increase of liquidities and the reduction of capital costs.
Another example of stock exchange markets integration is Eurex, created in 1998 by the
association of Deutsche Termin Borse with Swiss Options and Financial Futures Exchange .
Benefiting from a negociation platform and electronic liquidation, conceived as an integrated
system, Eurex offers to its participants operative, qualitative and low transaction costs services .
In December 2007, Eurex took over International Securities Exchange , too. Nowadays, Eurex is
the world leader on the financial derivatives market, creating a world decentralized market and
managing to offer a set of products, standard, different, liquid and available at an international
level, the volume of transactions exceeding 1,5 billion contracts per year.
The introduction of the unique currency, Euro, was considered as a factor of accelaration of the
paneuropean capital market creation. If the introduction of the euro currency acts as a stimulus in
the consolidation of the paneuropean bank system, it doesn´t favour in the same way the
integration of different capital markets, more precisely the market shares. Actually, the European
stock exchange area is dominated by traditional fact ors, often national factors. The impulse to
integrate the Eurpean stock exchange market seems to be given by the bond market. The fact that
the bond markets integration on European scale is more advanced than that of the market shares
is due to the fact th at the market shares don´t belong to the regulated stock exchange markets, but
to the over the counter markets.
Despite the associations between the realized stock exchanges, of the registered progress
regarding the integration of the bond market and tech incal infrastructure, a certain fragmentation
provoking inefficiency, marks a paradoxe of the European stock exchange system: the
fragmentation in 15 different European market shares contrasts with the international dimension
of European groups of industry and services, having as consequence much higher transaction
costs in Europe. This situation is strongly in opposition with that from the USA where there are
two dominant stock exchanges, in well separated areas: NYSE for the mature enterprises and
NASDAQ for the increasing enterprises.
So we are still far from the stock exchange market, globally unified, functioning 24 hours a day
on the five continents.
There are several indexes to measure the degree of integration of stock exchange markets. One
can mea sure the degree of integration of the markets, testing the reaction of the markets by the
news broadcast, the existence of the relations between the earning performances on long term, the

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coincidences of extreme events, etc. But the most simple method cons ists of the analysis of the
correlation between the stock exchange earning performances. In the ´70s, the correlation
between France, Great Britain and USA was between 40% and 50% and it was inferior to that
with Japan, of 30%. Since then, it didn´t stop increasing340. In the present, the correlation
between Germany, France, Great Britain and USA is of 80%, and the correlation with Japan
reached 50%. These datas can be interpreted in the following way: in the ´70s, in case the New
York Stock Exchange closed the month with increase, there were chances of about 50% that the
Paris Stock Exchange close also the month with increase.
Beside the advantages regarding the lower of transaction costs, a greater diversification of the
portfolios and a more optimal repar tition of risks, the integration of stock exchange markets
increased the fear of the contagion phenomenon.
In October 1929 , the United States of America experienced one of the most serious stock
exchange crisis from history. Between October 24 and Novem ber 13, New York Stock
Exchange Market loses 40% of its value. At the same time, in October 1929, Paris Stock
Exchange registers a lower of about 4%, then it loses again 3% in November and December. This
fact is certainly important, but yet we are far from the panic appeared on the Wall Street.
Actually, France didn´t suffer because of the crisis, but since the beginning of the second
semester in 1930, six months after the beginning of New York Stock Exchange Market´s
collapse.
In October 1987, the Dow Jon es index loses almost 23% of its value, in October 19. All the stock
exchange markets from the world collapse that day: the stock exchange indexes decreased with
20% in France and Canada, with 25% in Great Britain, with 40% in Australia and Hong Kong. Of
course, the consequences were very different from those in 1929, especially due to the
intervention of monetary authorities in order to avoid that stock exchange panic unleash a bank
crisis.
The rapidity of the crisis transmission is hence a new phenomenon : while several months were
necessary for the spread in the entire world of the financial crisis from 1929, in 1987, all the
markets have immediately reacted. And the collapse of the stock exchanges from 1987 is not an
isolated case. Since then, several ex amples confirm this quasi -simultaneous reaction of all the
stock exchanges during a period of crisis. We can mention the Asian crisis from 1997, the
reaction of the stock exchange markets at the moment of the attacks on the 11th September 2001
and the turb ulences of the stock exchange markets from all the world in October 2008.
Only American at the beginning, the actual financial crisis started on the subprime mortgages
markets, as a result of the prices fall in the real estate area. Then, it spread throug h the financial
channel with the announcement of the bankruptcy of the two hedge funds which have invested in
titles based on mortgages. Everywhere in the world, inclusively in China, the financial
institutions have invested massively in this kind of compl ex products resulting from the
securitization (the transfromation of negociable titles) of subprime mortgages341, the start of crisis
exposing them thus to massive loss. On a real plan, the prices fall in the real estate area lead to a
strong economic lower in the United States of America. But, on an international level, from the
very beginning of the crisis, there can be preview depreciations suffered by the banks which lead
to the collapse of the stock exchanges.
The consequences of the actual financial cr isis represented a greater depreciation registered at the
foreign stock exchanges, especially those from Europe than those from the United States of
America. Thus, CAC -40, the stock exchange market index of the capital market from Paris lost

340 François Longin și Bruno Solnik, „Is the Correlation in International Equity Returns Constant: 1960 -1990?‖,
Journal of Interna tional Money and Finance, vol. 14, no.1, February 1995, pp. 3 -26.
341 Patrick Artus, Jean -Paul Betbèze, Christian de Boissieu and Gunther Capelle -Blancard, La crise des subprimes,
˝Raports du CAE˝, no. 78, La Documentation française, Paris, 2008.

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25% in the per iod June 2007 -August 2008, while S&P 500 , its homologous from New York
didn´t diminish but with 15%.
Many observers have interpreted the simultaneous reaction of the stock exchange markets as a
phenomenon of contagion. The word contagion means the transmi ssion of the impact of a stock
exchange market to another one. More precisely, according to some researchers342, there exists
contagion only if, after an impact, the relation between the stock exchange markets is
significantly consolidated.
The authors J. Forbes and R. Rigobon evidenced in their study entitled „No Contagion, Only
Interdependance: Measuring Stock Market Co -Movements ‖ the fact that, in the moment of the
stock exchange market collapse from October 1987 or the Asian stock exchange crisis, the
correlation coefficients permitting the analysis of the relation between these crisis outbreaks and
other regions from the world having been affected by them, didn´t increase significantly and were
strong before the crisis, too. As a result, the transmissio n of the crisis could be rather explained
by a phenomenon of interdependence of the stock exchange markets, than by a contagion. This
means that the link unifying the capital markets became permanent, both in crisis period and in
normal period.
The intern ationalization tendency of market shares and development global capital market may
have thus negative consequences, too. Moreover, some specialists consider that the globalization
of the capital markets in the last decades of the past century was a determi native factor for the
successive financial crisis, starting from Mexico, Thailand, South Korea, Russia and Bresil.
Similarly, the reduced level of regulation of the international capital market increases the
opportunities for speculations and may affect the stability of national capital markets. A
globalized financial system, where hundreds of billion dollars may circulate simultaneously as a
reaction to the last news or only based on some psychological factors may become an unstable
system343.
The problem of reccurent crises and their transmission is raised with an extraordinary acuity in
the context of the actual imbalance. The financial crises will spare neither the emergent areas
(Latin America, Asia, Russia), nor the regions where the financial systems are more mature. Not
necessarily the nature of financial crises, but their way of transmission is what has changed
because of the actual financial globalization. For a long time, the spread of financial crisis was
represented as a phenomenon of repercussio n by means of different channels (commercial,
financial), or more simply expressed, as an effect of domino344.
In conclusion, because of the integration of capital markets, the economies are more and more
exposed to the common impacts which result the crisis of global dimension. In order to illustrate
the contagion of financial crises, one may resort to a metaphor, well -known by the financial
specialists: ˝when the Wall Street sneezes, Paris catches cold!˝.

Bibliography:
1. Patrick Artus, Jean -Paul Betbèze, Christian de Boissieu and Gunther Capelle -Blancard, La
crise des subprimes, ˝Raports du CAE˝, no. 78, La Documentation française, Paris, 2008.
2. Gunther Capelle -Blancard & Jézabel Couppey – Soubeyran L′intégration des marchés
boursiers, Questions interna tionales no34 November -December 2008, La Documentation
Française, 2008
3. Kristin J. Forbes&Roberto Rigobon „No Contagion, Only Interdependance: Measuring Stock
Market Co -Movements˝, The Journal of Finance, vol.57,no. 5, October 2002

342 Kristin J . Forbes&Roberto Rigobon „No Contagion, Only Interdependance: Measuring Stock Market Co –
Movements˝, The Journal of Finance, vol.57,no. 5, October 2002, pp.2223 -2261.
343 Ovidiu Stoica Mecanisme și instituții ale pieței de capital. Piețe de capital emergente, Ed. Economică, 2002, p.59
344 Gunther Capelle -Blancard & Jézabel Couppey – Soubeyran L′intégration des marchés boursiers, Questions
internationales no34 November -December 2008, La Documentation Française, p. 51

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4. François Longin and Bruno Solnik, „Is the Correlation in International Equity Returns
Constant: 1960 -1990?‖, Journal of International Money and Finance, vol. 14, no.1, February
1995
5. Ovidiu Stoica Mecanisme și instituții ale pieței de capital. Piețe de capital emergente, E d.
Economică, 2002