The integration of the Istanbul Stock Exchange (ISE) to the European Union stock markets

The issue of international market integration has been very popularin the finance literature. The aim of this study is to investigate whether theTurkish stock market is integrated or not with the European Union stockmarkets as a potential candidate for entering the EU.I use Engle-Granger co-integration test to investigate long-run co-integration relations between the Turkish stock market and the EuropeanUnion stock markets. I divide the sample into developed and emergingmarkets in order to assess whether the Turkish stock market is integratedmore with the developed or with the emerging markets of the EuropeanUnion, or both. The data used are monthly stock price indices from 1988through 2006 for developed markets of the EU and from 1994 through 2006for emerging markets of the EU.The results indicate the presence of long-run co-movements for allthe markets, both the developed and emerging, i.e., there is co-integrationbetween the Turkish stock market and the EU stock markets indicatinglimited benefits for portfolio diversification for the European Unioninvestors in the Turkish stock market. Also, using a dummy variable Iexamine whether integration between the ISE and the EU markets increasedor decreased during the post-Customs Union period. The results showincreasing co-integration only with the Austrian market among thedeveloped markets of the EU and with the Eastern European markets exceptHungary, integration with all the other markets decreased after the passageto the CU. The analysis of short-run relations between the markets usingError Correction Model shows that in average 7 percent of disequilibrium iscorrected each month in the developed markets and 8 percent ofdisequilibrium is corrected each month in the emerging markets.Key Words: 1) Co-integration, 2) International Diversification, 3) Stock Markets