Abstract
In financial economics, co-movements between equity returns are generally interpreted as a measure of equity market integration. In line with this idea, this paper investigates whether the euro equity markets have become less segmented over the last decade referring to three different estimates of pair-correlations, i.e., unconditional correlations, ex-post rolling estimates of correlations and dynamic conditional correlations (DCC). The analysis shows that pair-correlations within the euro area have indeed increased, suggesting higher financial integration of the euro equity markets. Additionally, the paper addresses the related issue of which factors have driven this integration process. The finding is that the increase in integration is explained by the relaxation of restrictions to capital mobility and of institutional barriers and by the economic convergence in Europe, while Stage Three of EMU has not further boosted integration.
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