The Impact of Political Uncertainty on the Financial Integration of Stock Markets

In this paper we investigate change in dependence structures of the Russian stock market with European, American ones under influence of the political instability caused by the international sanctions related to the actions of Russia in Crimea. We conduct the analyses under time varying frequencies. Firstly, we use novel CEEDMAN methodology (complete ensemble empirical mode decomposition with adaptive noise) to decompose stock indices into intrinsic mode functions (IMFs). Secondly, we calculate time-dependent intrinsic correlation (TDIC) between comparable IMFs to assess the dynamics of correlation between the markets over different time scales. Finally, we explain these changing financial integration (measured by TDICs) by our own news-based Russian Political Uncertainty Index (RPUI) via regression models. Main findings are firstly, that there is strong financial integration from Russia towards American and European stock markets, secondly, this integration dramatically decreased after the imposition of sanctions mainly on a large time scales and, finally, our RPU Index affects the dynamics of markets integration thereby confirming the hypotheses that the political instability explains the decrease in financial integration.