Please do not quote without authors permission. In this study we examine the degree of stock market integration and the impact of country risk on the pricing of European equity markets since the introduction of the Euro. We use a multivariate Garch (1,1)-in-mean return generating model allowing for partial integration with the yield spread with respect to Germany as our country risk proxy. We find that domestic stock market risk is still significant after the introduction of the Euro and that country risk is a non-negligible component of the excess expected return required for investing in EMU as well as in the enlarged European stock markets
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