Working Paper: NBER ID: w16583
Authors: Geert Bekaert; Campbell R. Harvey; Christian T. Lundblad; Stephan Siegel
Abstract: At a time of historic challenges to the viability of the Eurozone, we assess the contribution of the EU and the Euro to equity market integration in Europe. We use a simple and essentially model free measure of bilateral market segmentation: two countries are segmented if there is a wide divergence in the valuations of their industries. We first establish that segmentation is significantly lower for EU versus non- EU members. Bilateral valuation differentials remain lower for EU members even after we control for several possible channels of integration, such as bilateral trade, direct investment positions, financial regulation, and interest rate differences. Importantly, we find that EU membership reduces equity market segmentation between member countries whether or not members have also adopted the Euro. The Euro adoption as well as the anticipation of the Euro adoption has minimal effects on market integration.
Keywords: equity market integration; EU membership; euro adoption; valuation differentials
JEL Codes: F30; F31; F33; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower equity market segmentation (G12) | lower valuation differentials (D46) |
| adoption of the euro (F36) | minimal effects on market integration (F69) |
| EU membership (F36) | lower valuation differentials (D46) |
| EU membership (F36) | lower equity market segmentation (G12) |
| EU membership (F36) | lower average bilateral earnings yield differentials (J31) |