European Market Factors and Macroeconomic Fundamentals: Trend at Firm Level Including the IT Bubble and Sovereign Debt Crisis

We analyse the trend in global, country and industry effects at firm level based on an extensive database of 2048 equities spread over 17 European economies and 10 industry groups, running from 1974 to 2013. We find significant increasing market integration and decreasing country effects for most countries and industries since the advent of the EMU. However, these effects are now reversing in the wake of the sovereign debt crises. Industrial factor effects have decreased in technological sectors and increased in “old economy” sectors since the bursting of the IT bubble, and are larger than country effects in most countries and industries. From a macroeconomic point of view, we report evidence of a link between the percentage of variance that can be attributed to the country effect and government budget deficits/surpluses and sovereign risks. More strikingly, we find that global common factor effects anticipate changes in GDP by one to three terms. These results support the notion of market integration having macroeconomic predictive power.