European Union (EU) accession involves both political and economic reforms
which suggest changes with regard to financial markets. This study contains empirical
tests of four research questions relating to the effects of EU accession. The initial
question relates to effects on the level of integration between equity markets in
European transition economies and those in global as well as European economies.
The second research question explores changes in the level of influence of global
and local macroeconomic factors on equity market performance. The last two questions
explore the impact of EU accession on equity market volatility and return
levels. The study is based on data samples taken from eight markets which accessed
the EU in May 2004.
The study provides evidence of a significant increase in the level of equity market
integration, measured by co-movement between equity indices in transition
economies and global reference indices. This implies that while successful market
liberalisation involves an increase in the level of co-movement, as is concluded in
existing academic research, further equity market co-movement can be expected as
a result of EU accession. With regard to the co-movement with European reference
indices, the results of the study suggest that increases occur at stages prior to the
actual EU accession announcement and that no statistically significant change
occurs in association with EU accession.
The study also provides evidence suggesting that the influence of macroeconomic
factors shifts from local to global factors in association with the EU accession.
Global factors demonstrate a significant increase in explanatory power after
the accession, while a corresponding decline is found for local factors.
Finally, the study provides evidence of a significant decline in equity market
volatility coupled with limited changes in the return levels in most markets. This
implies that while there is only some evidence of changes in the return levels which
are not adjusted for risk, there is clear evidence of increasing risk-adjusted returns
in association with EU accession.