The European Union, the Euro, and equity market integration

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 fi rst establish that segmentation is signfi cantly 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, fi nancial regulation, and interest rate differences. Importantly, we nd 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