EMU and European Stock Market Integration

This paper examines the level of integration of European stock markets. We estimate a conditional asset pricing model, which allows for a time-varying degree of integration that measures the importance of EU-wide risk relative to country-speci c risk. The model accounts for intra-European currency risk, time-varying quantities and prices of risk. The results indicate that the degree of integration is negatively related to forward interest di erentials visa-vis Germany, i.e. positively related to the probability of a country joining EMU, and that integration increases substantially over time, especially since 1995, when these di erentials began shrinking. JEL Classi cation: G12, G15