Is there financial integration in the equity markets of the European Union?

Both casual observation and empirical research suggest that developed equity markets around the world, including the major European markets, are now highly integrated. Financial integration is a key goal of the European Union (EU) and was one motive for the adoption of the euro. In this article, we examine how far the process of financial integration has gone in the equity markets of the EU. We use an econometric methodology that permits us to measure the equity market convergence while allowing for a range of possible time paths, and for heterogeneity across countries. Our tests reject the hypothesis of overall convergence in the European equity markets. We do, however, find evidence of convergence within three distinct and economically meaningful subgroups of European markets. We find no evidence that the Euro has hastened equity market convergence amongst its members, above and beyond the broader global trends of lowered institutional and legal barriers and market liberalization.