Discussion paper

DP2124 EMU and European Stock Market Integration

The paper examines whether or not the convergence process of European economies towards Economic and Monetary Union has led to increased integration of European stock markets. We estimate a conditional asset pricing model, which allows for a time-varying degree of integration that measures the importance of EU-wide risk relative to country-specific risk. The model accounts for intra-European currency risk, time-varying quantities of risk and time-varying prices of risk. The results indicate that the degree of integration is closely related to forward interest differentials vis-a-vis Germany, i.e. to the probability of a country joining EMU. Integration increases substantially over time, especially since 1995, when these differentials began shrinking, and by mid-1998, six months before the official date for EMU launch, stock markets in EMU member states seem to be almost fully integrated. The average saving in the cost of capital from integration in Europe over the period 1992-1998 is estimated at around 2%.


Hardouvelis, G, R Priestley and D Malliaropoulos (1999), ‘DP2124 EMU and European Stock Market Integration‘, CEPR Discussion Paper No. 2124. CEPR Press, Paris & London. https://cepr.org/publications/dp2124