The European Union, the Euro, and Equity Market Integration

Abstract

We use industry valuation differentials across European countries to study the impact of membership in the European Union as well as the Eurozone on both economic and financial integration. In integrated markets, discount rates and expected growth opportunities should be similar within one industry, irrespective of the country, implying narrowing valuation differentials as countries become more integrated. Our analysis of the 1990 to 2007 period shows that membership in the EU significantly lowered discount rate and expected earnings growth differentials across countries. In contrast, the adoption of the Euro was not associated with increased integration. Our results do not change when the sample is extended to include the recent crisis period.

European financial market dependence: An industry analysis

“…Estimating the balanced sample over the same period as the unbalanced sample leads to an insignificant EU effect (but significant Euro effect).22 Controlling for EU membership appears to improve the identification of the Euro effect, suggesting that our main results are robust even though we are unable to control for this effect.23 Bekaert et al (2013) use the divergence in valuations of industries between country pairs as a measure of equity market segmentation and found that EU membership reduces equity market segmentation between member countries independent of whether members have also adopted the Euro. Their results suggest that the Euro adoption as well as the anticipation of the Euro adoption has minimal effects on market integration.…”

“…AlthoughBekaert et al (2013) suggest that membership in the EU has significantly influenced European stock market integration, we are unable to control for this effect with our methodology directly, but do so in a robustness test using panel regressions.16 Potential concerns are the stability of model parameters and the existence of structural changes during our sample period. Controlling for the volatility effect can potentially address these concerns since it represents a time-varying proxy for market conditions.…”

“…Because Bekaert et al (2013) report evidence for an impact of EU membership on European stock market integration, one may argue that the identification of the Euro effect in the results of Table 3 is insufficient. While we are unable to include an appropriate control for this effect in our methodology, we can consider an EU effect in panel regressions using the dependence level of industry index returns with the corresponding EMU index returns as the dependent variable.…”

“…Danthine et al (2001) show that lower cost of cross-country transactions and improved liquidity, breadth, and depth of markets have advanced the integration of European financial markets. Kim et al (2005), Bartram et al (2007), and Cappiello et al (2010) also find a clear shift in European stock market dependence associated with the introduction of the EMU using different econometric approaches, while Bekaert et al (2013) dismiss such an effect. Bartram et al (2007) study changes in the dependence between countries in the context of the Euro using a conditional copula dependence model, but do not analyze industries or potential drivers of dependence.…”

“…Existing evidence on industrial dependence or integration in the literature is limited(Cappiello et al, 2010;Bekaert et al, 2013).…”