Review of world economics vol:139 issue:2 pages:276-305
In this paper, the standard International Arbitrage Pricing Theory is used to assess the effects of European monetary unification on the functioning of the European financial market. In particular, the focus is on the effects that unification may have had on the risk-sharing capacity of the financial markets. It is found that, already in the ERM decade, exchange rate changes do not (unconditionally) correlate strongly with financial market movements across countries. Consequently, elimination of exchange rate variability through monetary unification is not likely to have major implications for the pricing behavior in EMU.