Indices as diversification instruments in Europe – MP Laurent Indices as diversification instruments in Europe Marie-Paule Laurent†‡

This paper focuses on the evolution of financial markets in Europe over the last decade. This period was characterized by an integration process both at economic and at financial level. The analysis examines to what extent this development has influenced European stock return drivers. The empirical investigation is performed with daily returns of 17 country and 12 sector European indices over a 10-year period (January 1992- December 2001). Country and sector effects are compared through their performances and their diversification potential. The latter analysis combines the evolution of the cross-correlation structure and the changes in volatility. It also gives some insights on investment strategies. The results tend to indicate that the European financial market remains segmented although a significant move toward integration is observed. A consequence for investors is that sector diversification becomes essential. This last result was controlled for the ‘technology bubble’