EMU's Impact on the Correlation Across the European Stock Markets
Athens University of Economics and Business
September 15, 2003
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.
Number of Pages in PDF File: 33
Keywords: EMU, European equity markets, Correlation, EGARCH-M, Market integration
JEL Classification: G15, C32, C53, F36
Date posted: April 25, 2005