Testing the Causality and Cointegration between the Performance of Euronext Stock Exchange Indexes

Abstract

The aim of this study is to test the causality and cointegration between the Euronext stock exchange performance indexes. However, for attainment purpose of this goal, we conducted a standard study on the (25AEX, CAC40, PSI20 and BEL20) indexes during the period spanning from January 2010 to June 2021. In virtue of which, the results of the conducted study indicate that the VAR model is dynamically stable, and stands for a strong model. More to the point, it was also found through the Granger causality test that there is a bidirectional reciprocal causal relationship between the CAC40 and the AEX25 indexes, as both indexes cause each other, whilst the causal relationship between the AEX25 and BEL20 indexes was a unidirectional causal relationship from AEX25 index to BEL20 index. In addition, the causal relationship between the CAC40 and BEL20 indexes has shown to be a unidirectional causal relationship from CAC40 index to BEL20 index. More to the point, the results have alike demonstrated that there is no bidirectional causal relationship between the PSI20 and AEX25 indexes, between the PSI20 and CAC40 indexes, and between the PSI20 and BEL20 indexes; in other words, no index causes the other. Nonetheless, it was found, through the response and reaction function that causing a random shock in the AEX25 index directly and inversely affects the AEX25, CAC40, PSI20 and BEL20 indexes; likewise, causing a random shock in the CAC40 index inversely affects the AEX25, CAC40, PSI20 and BEL20 indexes. Similarly, it was found that causing a random shock in the PSI20 index inversely affects the AEX25, PSI20 and BEL20 indexes, and inconstantly affects CAC40 index. In addition, causing a random shock in the PSI20 index adversely affects the AEX25 index, and inconstantly affects the CAC40, PSI20 and BEL20 indexes. Nevertheless, it turned out, through analyzing the variance components, that the two indexes AEX25 and CAC40 explain a large percentage of variance in the AEX25 index, and that the two indexes AEX25 and CAC40 explain a large percentage of variance in the CAC40 index; more and more, it turned out that the AEX25, CAC40 and PSI20 indexes explain a large percentage of variance in the PSI20 index, and that the two indexes AEX25 and BEL20 explain a large percentage of variance in the index CAC40.