European Economic Integration and Stock Market Co‐Movement with Germany

Using daily returns from 1980‐2006, we find a significant contemporaneous association between all European Union (EU) equity markets and Germany. There is, however, no significant indication that the German stock market leads or lags the movements in the other EU stock markets. A higher share of imports by Germany from other EU countries, as well as fluctuations and increased volatility in the exchange rate, have negative effects on stock market co‐movements. Conversely, the difference in equity market capitalization with Germany, the greater the foreign direct investment by Germany, and the fact of belonging to the eurozone all contribute to greater stock market co‐movement.