ABSTRACT
This chapter examines the integration process of the different euro area bond and equity markets. The government bond markets of the euro area are the main source of financing for central and local governments within the area. The lower cost of capital in integrated equity markets reflects the better possibilities international investors have to eliminate country-specific risks by diversifying their portfolios across countries. The European corporate bond market is relatively young, certainly compared to the government bond market. The heightened interest in cross-border equity trading has led euro area stock exchanges to expand across their national borders. To the extent that the euro area equity markets become more integrated, one should expect a convergence in the amount of systematic risk local investors have to bear, and hence a more homogeneous valuation of equities across countries. In integrated markets, investors treat local news more and more as 'idiosyncratic', and hence diversifiable by investing internationally.
