Economic Integration and Country Allocation in Europe

The impact of European integration—at the company and macro levels—on correlations between stock market returns is analyzed. A new procedure based on randomization methodology is introduced to test for the absence of country-systematic differences in the return patterns of two stock markets. The results indicate that stock market integration in Europe is not yet complete, but the comovement of European markets has increased substantially and is likely to continue to grow. Therefore, top-down managers of European equity portfolios need to look for a new strategy other than country-based allocation.