Emu's Impact on the Correlation Across the European Stock Markets

Abstract

This paper examines the impact of the establishment of the European Monetary Union (EMU) on the correlation among eleven EMU markets and the UK. We estimated an exponential GARCH-M (1,1) econometric specification, including in the mean equation two risk factors (the variance risk and the covariance risk) and concluded that the large EMU markets became more correlated after the formation of EMU, while the smallest EMU market (Austria) became more isolated. Finally, it is interesting that the covariance risk is the key factor which drives the return series after the launch of EMU, confirming the increased correlation.

Keywords: EMU, European equity markets, Correlation, EGARCH-M, Market integration

JEL Classification: G15, C32, C53, F36