Financial market integration and cross-border spillover effects in Europe.

The ongoing political, legal, and economic harmonization within the European Union has lead to a higher degree of integration of national financial markets. The introduction of the single European currency, the euro, eliminated a traditional source of risk to international portfolio investors. In light of these developments, Part I of the empirical analysis had the following objectives: (1) to determine the relative importance of country, sector, and industry factors in explaining individual company's stock return behavior in the wake of the formation of the European Union, (2) to identify the multiple factor model, consisting of country and/or sector and/or industry factors, that was best at explaining European stock returns over the observation period, (3) to discover cross-sectional differences and non-stationarity in the industry portfolio return sensitivity to country, sector, and industry factors, (4) to find out whether the European market had become more independent from the other two major trading areas, the US and the Pacific Rim, over the period 6/1994 to 6/1999, and (5) to quantify industry structure-related changes in portfolio diversification benefits in European stock portfolios.