Dynamics of Equity Market Integration in Europe: Impact of Political Economy Factors

Abstract:     
Unlike most prior literature in finance and economics, this paper focuses on events in the political economy and examines the integration of European equity markets over the 1988 through 2002 period using three innovative techniques that assesses how the level of integration in equity price levels changes over time. The results show that notwithstanding the rising interdependencies between the European and US equity market until the mid-1990s, the long run integrative relationships governing the European markets began to strengthen only in the late 1990s and in particular since 1997. This evidence suggests that despite several years of political willingness by European leaders to integrate economies, it was not until the Treaty of Amsterdam and the establishment of the European Central Bank that the markets deemed that European integration would in fact occur.

Number of Pages in PDF File: 25

Keywords: Integration, Kalman Filter, EMU, Cointegration

JEL Classification: C22, E44, F36

Accepted Paper Series