Diversification Portfolio Strategies and Financial Integration: Toward a European Capital Market?

The goal of this paper is to revisit the effects of the implemntation of the Euro system on the level of European stock market integration over the last fifteen years. In this context, two fundamental questions can be raised: Does the asset management industry attain acceptable levels of diversification in their portfolios? Can the convergence of European economies towards Economic and Monetary Union (EMU) and the launch of the single currency lead to an increase in stock market integration? To answer these questions, we empirically investigate the influence of the EMU on covariations in stock market integration/segmentation dynamics using an original principal component analysis in the presence of group structure. The findings represent an important step towards the setting up of strategic and tactical asset allocation processes.