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The European Union, the Euro, and Equity Market Integration

  • Geert Bekaert
  • Campbell R. Harvey
  • Christian T. Lundblad
  • Stephan Siegel

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 significantly lower for EU versus non- EU members. Bilateral valuation differentials 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 differences. Importantly, we find 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 effects on market integration.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16583.

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Date of creation: Dec 2010
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Publication status: published as Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian T. & Siegel, Stephan, 2013. "The European Union, the Euro, and equity market integration," Journal of Financial Economics, Elsevier, vol. 109(3), pages 583-603.
Handle: RePEc:nbr:nberwo:16583
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