An Empirical Investigation on the Financial Integration between Arab Countries and the European Union Using Johansen Approach

Abstract

The objective of this research is to examine the extent of integration between the European Union countries and the Arab countries financial markets. There are several methods have been used to examine the existence of integration. However, the Johansen approach to integration is considered a more reliable method than other conventional integration approaches and is applicable irrespective of the order of integration of the time series. Unlike most of the conventional integration procedures, which are valid for large sample size, Johansen approach is more robust and performs well for large sample sizes. The results of the test show that when Arab market index is a dependent variable, the null hypothesis of no integration cannot be accepted. This suggests the existence of a long-run relationship between European Union markets and Arab markets. While, when European Union is the dependent variable, the null hypothesis of no cointegration can be accepted. According to the results, both markets are moving together in the same direction when Arab markets are the dependent variable while not in case of the European Union is the dependent variable.

Keywords: Financial Markets Integration, Johansen Approach, Law of One Price (LOOP), Capital Asset Pricing Model (CAPM), Market Capitalization, Arab Countries, European Union (EU).