Co-movement of the Greek Stock Market with four major Eurozone stock markets before & after the financial crisis: A co-integration approach

In this study we examine the co-movement between the Greek, German, French, Italian and Spanish equity market before and after the financial crisis of 2007-2008, by applying co-integration analysis. The empirical results indicate one co-integrating vector amongthe five Eurozone equity markets for both periods, implying that the five markets share in both periods a long-run equilibrium. Thesefindings have some significant implications for European-oriented portfolio diversification because the traditional techniques based on correlations lose their effectiveness in the presence of co-integration. Furthermore, we investigate the short-run casual relationships between the five markets to assess if the financial crisis changed these relationships and to determine which markets have a short-run significant effect on the others.We found that in the short-run there are significant casual relationships, as well as deviationsfrom the long-run equilibrium, especially after the financial crisis.Hence, investors with short investment horizons could achieve high returns across these five markets. Keywords: Co-integration analysis; Financial Crisis 2007-2008; Portfolio diversification; Casual relationships