"The European Union, the Euro and Equity Market Integration"
Working paper,
March
2010
Publication type: Working paper
Research Archive Topic: Business Economics and Public Policy, Corporate Finance, World Business
Abstract
At a time of historic challenges to the viability of the Eurozone, we assess the contribution of the EU and the Euro to equity market integration in Europe. We use a simple and essentially model free measure of bilateral market segmentation: two countries are segmented if there is a wide divergence in the valuations of their industries. We first establish that segmentation is signi cantly lower for EU versus non-EU members. Bilateral valuation di fferentials remain lower for EU members even after we control for several possible channels of integration, such as bilateral trade, direct investment positions, financial regulation, and interest rate diff erences. Importantly, we fi nd that EU membership reduces equity market segmentation between member countries whether or not members have also adopted the Euro. The Euro adoption as well as the anticipation of the Euro adoption has minimal e ffects on market integration.
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