INTERGRATION OF EUROPEAN EQUITY MARKETS

Abstract

This thesis analyses the integration levels of European equity markets towards a regional market and the world market. In addition, we test for seasonality and unit root presence in the equity market indices. We use the returns of national equity indices of five euro-countries. We compare these to the STOXX Europe 50, representing our regional market, and MSCI World, representing the world market. First, in the results of the seasonality test, we find little evidence of consistent seasonal patterns, other than the first years after the introduction of the euro, which may be due to external political factors. Secondly, using an Augmented Dickey-Fuller test, we find no evidence of unit root present in the returns of the indices. However, we can’t reject the unit root when the levels of the indices are used. Thirdly, by using a modified Jorion-Schwartz regression model, we find significant evidence that the European equity markets are highly integrated towards the European regional market, meanwhile, in some cases exhibiting segmentation towards the world market.