# How Does European Integration Affect the European Stock Markets?

## Author Info

• Burcu Erdogan
Registered author(s):

## Abstract

This paper examines the integration of stock markets in Germany, France, Netherlands, Ireland and UK over the January 1973- August 2008 period at the aggregate market and industry level considering the following industries: basic materials, consumer goods, industrials, consumer services, health care and financials. The analysis is practised by using correlation analysis, $\beta$-convergence and $\sigma$-convergence methods. $\beta$- convergence serves to measure the speed of convergence and $\sigma$-convergence serves to measure the degree of financial integration. We might expect priori that European stock markets have been more integrated during the process of monetary, economic and financial integration in Europe. We find evidence for an increasing degree of integration both at the aggregate level and also at the industry level, although some differences in the speed and degree of convergence exist among stock markets. To our surprise, there is a downward trend in convergence for certain industries in certain countries in 2000s; especially for those industries, which are more prone to regional shocks, such as health care, financials and consumer services. Moreover, the cross sectional dispersion in health care industry has not shown a regular descending trend. Additionally, EU wide factors can better explain the changes in returns than those of US.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.96131.de/diw_finess_01011.pdf

## Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Working Paper / FINESS with number 1.1a.

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Length: 24 p.
Date of revision:
Handle: RePEc:diw:diwfin:diwfin01011

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## Related research

Keywords: Financial integration; EU; stock markets; correlation analysis;

Find related papers by JEL classification:

• C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
• G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
• G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
• F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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## References

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1. Fratzscher, Marcel, 2001. "Financial market integration in Europe: on the effects of EMU on stock markets," Working Paper Series 0048, European Central Bank.
2. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
3. Robin Brooks & Marco Del Negro, 2002. "The rise in comovement across national stock markets: market integration or IT bubble?," Working Paper 2002-17a, Federal Reserve Bank of Atlanta.
4. Hardouvelis, Gikas A & Malliaropoulos, Dimitrios & Priestley, Richard, 1999. "EMU and European Stock Market Integration," CEPR Discussion Papers 2124, C.E.P.R. Discussion Papers.
5. Cappiello, Lorenzo & Gérard, Bruno & Kadareja, Arjan & Manganelli, Simone, 2006. "Financial integration of new EU Member States," Working Paper Series 0683, European Central Bank.
6. Taylor, Mark P & Tonks, Ian, 1989. "The Internationalisation of Stock Markets and the Abolition of U.K. Exchange Control," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 332-36, May.
7. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
8. Heston, Steven L. & Rouwenhorst, K. Geert & Wessels, Roberto E., 1995. "The structure of international stock returns and the integration of capital markets," Journal of Empirical Finance, Elsevier, vol. 2(3), pages 173-197, September.
9. Manganelli, Simone & Hartmann, Philipp & Maddaloni, Angela, 2003. "The euro area financial system: structure, integration and policy initiatives," Working Paper Series 0230, European Central Bank.
10. Markus Baltzer & Lorenzo Cappiello & Roberto A. De Santis & Simone Manganelli, 2008. "Measuring financial integration in new EU member states," Occasional Paper Series 81, European Central Bank.
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