Monetary Integration and Real Estate Markets: The Impact of Euro on European Real Estate Equities

Abstract

This paper assesses the impact of the monetary integration project on different types of stock returns in Europe. In order to isolate European monetary factors, the impact of global equity integration is investigated. European countries are sub‐divided according to the differences in the timing and degree of monetary integration. Analysis shows that national equity indices are strongly influenced by global market movements, with a European stock factor providing additional explanatory power. The global and European factors explain small cap and real estate stocks much less well – suggesting an increased importance of local and national drivers. However, there is little evidence to suggest that monetary integration is causing the phenomenon. For all sectors investigated, the European factor affects non‐Eurozone members and non‐EU members in the same way as Eurozone members. Further, the importance of global and European factors has almost invariably increased over time. For real estate equities, the largest increase in correlation was for non‐Eurozone and non‐European Union markets. One possible interpretation is that broader regional economic integration rather than more narrow monetary integration is driving the European factor.