Stock exchange consolidation and return volatility

Abstract

Purpose

In recent years, stock exchanges have been increasingly integrating and merging their activities at a national and international scale. While consolidation is often driven by technological, legal and competitive changes, whether merger activities are efficient in terms of market microstructure remains unknown. Academic research to date has analyzed the causes behind these mergers primarily from the technological, legal and competitive perspective, whereas relatively little literature considers their impact on the exchange itself. The paper aims to consider the case of the Euronext merger to explain this topic by studying this merger and its effect on Euronext's market risk (measured by volatility).

Design/methodology/approach

The paper uses a standard General Auto‐regressive Conditional Heteroskedasticity (GARCH (1,1)) process to study the volatility of the underlying markets and use break methodology to highlight the merger effects. It also adds control samples to account for any change in volatility that could be caused by factors other than the merger event.

Findings

The results suggest that the Euronext merger did not affect the market risk. In particular, the paper finds no evidence that the integration onto the same platforms for trading and clearing had a significant effect on the volatility of the merging markets.

Practical implications

This study contributes to clarify business issues and to guide policy makers on exchange industrial organization.

Originality/value

The present paper further contributes to the ongoing discussion about the drawbacks and merits of horizontal exchange integration.

Citation

Ben Slimane, F. (2012), "Stock exchange consolidation and return volatility", Managerial Finance, Vol. 38 No. 6, pp. 606-627. https://doi.org/10.1108/03074351211226256