The effects of the introduction of the Euro on European stock markets

Abstract

This paper reviews the effects of the introduction of the euro on European stock market values by analyzing the short and long-term performance of different European index values. The study is based on the assumption that the introduction of the euro has had beneficial effects and that these effects were not fully impounded in the stock prices prior to the event. The study compares the stock market reactions of those European countries that have adopted the euro with those that did not join the Eurozone. To examine the sources of the effects of the euro, the Eurozone sample is partitioned into different subsets to analyse the reactions of different countries and different size ranges. The results are consistent with the hypothesis that the introduction of a single currency has positive effects on participating countries immediately after the event. However, there is no abnormal performance in the three and five years following the introduction of the euro. The investigation of the country subsets provides evidence that the stabilization of fundamentals is a major source of these effects since positive abnormal returns are higher for traditionally unstable countries. The analysis of different size subsets shows that the benefits are higher for larger firms than for smaller firms. This finding supports the hypothesis that microeconomic effects, particularly the increase in economic efficiency, are a second important source for the effects that the introduction of the euro has had on European stock markets.