Co-Movement of European Equity Markets after the Euro

Abstract

Euro was launched on January 1, 1999 as a common currency for members of the European Union that complied with the Maastricht Treaty. The Maastricht Treaty calls for coordination of major macroeconomic policies such as inflation, budget balance, public debt and long-term interest rate. Theoretically, coordination of these policy issues and the launching of a common currency increase the degree of market integration among the member countries. This paper empirically tests the impact of the Euro on the degree of co-movement of the European equity markets and a sample of OECD equity markets. Weekly stock market indices for the period of seven years before the Euro and seven years after the Euro are used. The results show that cross-country divergences of stock markets continue after the euro. There is no evidence of cointegration after the adoption of the euro. Cross-country portfolio diversification continues to be beneficial even among the euro countries.