Modeling International Price Relationships and Interdependencies between EU Stock Index and Stock Index Futures Markets : A Multivariate Analysis

Over the past fifteen years, financial markets have become increasingly global. The gradual dismantling of regulatory barriers and the introduction of more advanced technology, particularly in data processing and telecommunications, have called for new market structures and practices. Asset and liability management has increasingly become a globally integrated function and the issuance of international securities is often used as a substitute for more traditional funding channels. These developments are to be welcomed in so far as the increased level of competition is expected to lead to a more efficient allocation of capital, both nationally and internationally, lower-cost financial services and new means of hedging risk. However, they also present a new regulatory challenge in securing financial stability. It was the 1987 world-wide stock market crash in particular which highlighted the inadequacies of a regulatory framework still largely based on old institutional divisions and national jurisdictions. In the globalized security markets, the main challenge for both investors and policy makers is to take advantage of and promote efficiency enhancing aspects of market interaction, while containing and controlling the undesirable destabilising effects