Evidence of Stock Market Integration and Short-Term Active Portfolio Opportunities in the EMU Countries with a Gaussian Markov-Switching Test

Abstract

In this paper we tested, with a two-regime Gaussian Markov-switching model, the weekly performance of the euro valued MSCI EMU index and the MSCI EMU indices that exclude each country member. We did this in order to test the long-term market integration and to identify potential short-term opportunities for active portfolio management activities. Our results suggest that even if the EMU stock markets are integrated in the long-term, when we filter the data in two regimes (one for normal time periods and another for crisis ones) we found strong evidence in favor of active portfolio management activities by potentially increasing the portfolio performance if we exclude Finland, Italy, Spain and Portugal in normal time periods and Italy, Spain, France and Finland in the crisis ones. This last result is of interest because France is the second biggest EMU economy and, as Finland, is not considered a “peripheral” country.