Monetary Union effects on European stock market integration: An international CAPM approach with currency risk

This paper explores the evolution of European stock markets integration with the US stock market, after the formation of European Monetary Union (EMU). To this end, we employ a dynamic version of international CAPM in the absence of purchasing power parity. The conditional covariance matrix of asset returns is estimated employing a parsimonious diagonal BEKK multivariate GARCH-in-mean model. The data sample is daily extending from June 1994 to June 2009. The introduction of world-wide information variables into the system reveals that the formation of monetary union has not exerted positive influence on EMU markets integration with US stock market. Moreover at the same time rolling estimates show that member states domestic or idiosyncratic risks have exhibited a lower volatility level.