Dynamic Stock Market Integration Driven by the European Monetary Union: An Empirical Analysis

Abstract

We examine the influence of the European Monetary Union (EMU) on the dynamic process of stock market integration over the period 2 January 1989-29 May 2003 using a bivariate EGARCH framework with time-varying conditional correlations. We find that there has been a clear regime shift in European stock market integration with the introduction of the EMU. The EMU has been necessary for stock market integration as unidirectional causality was found. Linear systems regression analysis shows that the increase in both regional and global stock market integration over this period was significantly driven in part, by macroeconomic convergence associated with the introduction of the EMU and financial development levels.