The Euro Effect on the Integration of the European Stock Markets

Abstract

Since there is not a single European stock market, the main objective of this work is to verify whether the euro introduction affects the integration of the European stock markets, and to investigate whether the integration of the European stock markets has increased after the introduction of the euro. To do so, the Vector Autoregression (VAR) methodology is applied, more specifically the Impulse Response Function (IRF) is estimated. The euro has clearly added to the pressures from technological change and globalisation for the creation of new alliances among Europe's exchanges. In fact, the main conclusions of this empirical study show the following findings: (1) The stock markets considered presented a high degree of integration and efficiency before the euro. Therefore both stock prices and volatilities reflect idiosyncratic characteristics of each stock market, and the euro does not increase the degree of correlation between them. On returns, however, the increase of the correlation after the euro is noticed between the main stock exchanges: the German, French, Italian, Dutch and Spanish ones. (2) Inside the European stock exchanges, the German one has become a leader market after the euro. (3) The euro area is acquiring a major importance with respect to the other two main financial areas, the US$ and the Yen, and maintains its influence on the Swiss franc area. Moreover, the national stock markets in Europe have reduced their dollar dependence, and increased their influence on the Yen. Definitely the integration in EU equity markets has been mainly evident during the 1990s, but the introduction of the euro has accelerated the intensity of the process.