European stock market integration

This paper analyses the variation in the degree of integration of European markets since the arrival of the euro, and whether or not this event has had an equal effect on the firms that form part of a benchmark and those outside it. The degree of integration is measured by the relevance of the industry factor with relation to the country factor in explaining return. We postulate a two factor model for returns, these factors being industry and country. Through the R2 time series, and formal testing of individual and joint significance of coefficients, the degree of integration is inferred. Results indicate that the nationality of firms continues to be of fundamental importance. The industry sector to which a firm belongs is of greater relevance after the arrival of the euro, but it is not the only factor that explains return. Large firms included in the Stoxx index are more integrated than small firms. These results hold for both European and Euro samples.