Financial mondialization designate the enlargement movement and the opening of capital 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 imstock exchange indexes, stock exchange markets integration, contagion phenomenon, financial crisis

SABAU-POPA CLAUDIA DIANA

English

Research Papers in Economics

640 
 
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. Universităţii no. 1, 0741206643, 
dpopa@uoradea.ro 
 
Financial mondialization designate the enlargement movement and the opening of capital 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 the 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 evolution 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, London, New 
York, Paris and Tokyo) represents one of the best way of illustration of financial mondialization, 
the increase and 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 favoured 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 
position
338.  
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 exchanges 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 lead 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 56%. 
                                                       
338  Gunther  Capelle-Blancard  &  Jézabel  Couppey-  Soubeyran  L′int￩gration  des  march￩s  boursiers  ,Questions 
internationales no34 November-December 2008, La Documentation Française, p. 43 
339 The formula belongs to Henri Bourguinat. 641 
 
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,  forming  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  benefit  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 regulations, 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 factors, 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 that 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 techincal 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 measure 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 642 
 
coincidences of extreme events, etc. But the most simple method consists 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  increasing
340. 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 Jones 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 turbulences 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  complex  products  resulting  from  the 
securitization (the transfromation of negociable titles) of subprime mortgages
341, 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 crisis 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 Fran￧ois Longin şi Bruno Solnik, „Is the Correlation in International Equity Returns Constant: 1960-1990?‖, 
Journal of International 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 fran￧aise, Paris, 2008. 643 
 
25% in the period 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 transmission of the impact of a stock 
exchange market to another one. More precisely, according to some researchers
342, 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 transmission 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 internationalization 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 determinative 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 
system
343. 
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 domino
344. 
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 fran￧aise, Paris, 2008.   
2.  Gunther  Capelle-Blancard  &  Jézabel  Couppey-  Soubeyran  L′int￩gration  des  march￩s 
boursiers,  Questions  internationales  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 şi instituţii ale pieţei de capital. Pieţe de capital emergente, Ed. Economică, 2002, p.59 
344  Gunther  Capelle-Blancard  &  Jézabel  Couppey-  Soubeyran  L′int￩gration  des  march￩s  boursiers,  Questions 
internationales no34 November-December 2008, La Documentation Française, p. 51 644 
 
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 şi instituţii ale pieţei de capital. Pieţe de capital emergente, Ed. 
Economică, 2002   

Couppey- Soubeyran L′int￩gration des march￩s boursiers,

Forbes&Roberto Rigobon „No Contagion, Only Interdependance: Measuring Stock Market Co-Movements˝, The Journal of Finance,

Is the Correlation in International Equity Returns Constant: 1960-1990?‖,

La crise des subprimes, ˝Raports du CAE˝, no. 78, La Documentation franaise,

Mecanisme şi instituţii ale pieţei de capital. Pieţe de capital emergente,

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

http://steconomice.uoradea.ro/anale/volume/2009/v3-finances-banks-and-accountancy/108.pdf

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

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