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Financial market integration in Europe: on the effects of EMU on stock markets
Author(s) -
Fratzscher Marcel
Publication year - 2002
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.187
Subject(s) - economics , financial integration , equity (law) , financial market , exchange rate , volatility (finance) , market integration , interest rate , financial economics , interest rate parity , autoregressive conditional heteroskedasticity , economic and monetary union , monetary economics , international economics , european union , macroeconomics , finance , political science , law
This paper analyses the integration process of European equity markets since the 1980s. Its central focus is on the role that EMU, and specifically, changes in exchange rate volatility, has played in this process of financial integration. Building on an uncovered interest rate parity condition to measure financial integration, a trivariate GARCH model with time‐varying coefficients yields three key results: first, European equity markets have become highly integrated only since 1996. Second, the Euro area market has gained considerably in importance in world financial markets and has taken over from the USA as the dominant market in Europe. Third, the integration of European equity markets is in large part explained by the drive towards EMU, and in particular the elimination of exchange rate volatility and uncertainty in the process of monetary unification. Copyright © 2002 John Wiley & Sons, Ltd.