ach Eurozone country has its own time‐varying degree of stock market integration. The degree of integration is bounded between zero and unity and conditioned on a broad set of monetary, currency, and business cycle variables. These variables estimate the gradual nominal and real convergence of the European economies during the pre‐monetary union period. Among the included variables, the most prominent one is each country’s forward interest rate differential with Germany which was widely used by market analysts as an indicator of the probability that an EU country would eventually manage to join the Eurozone. In the second half of the 1990s, the degree of integration gradually increased to the point where individual Eurozone country stock markets appear to be fully integrated into the EU market. There have been two main factors that driven the increase in the level of integration: the evolution of the probability of joining the single currency and the evolution of inflation differentials (Gikas A. Hardouvelis, Dimitrios Malliaropulosa, Richard Priestleyd, 2007). Moreover, economic integration resulted in business‐cycle convergence. Cross‐country return correlations and business cycles are related. Monetary and fiscal policy coordination may have led to increased synchronization of business cycles among EMU member countries, which could have led to increased correlation of expected corporate earnings and more homogeneous estimates of European equities (Gikas A. Hardouvelis, Dimitrios Malliaropulosa, Richard Priestleyd, 2007). In the 1990s there is a process of increased integration of European stock markets to the prospects of the formation of EMU and the adoption of the euro as the single currency. During the 1990s, the degree of integration of each country’s stock market with the EU market was negatively related to both its forward interest rate differential with Germany and its inflation differential with the best three performing countries. Also, the inflation differential was a major indicator of whether a country with a high inflation had the ability to achieve nominal convergence and satisfy a major criterion for admittance into the Eurozone. The process of integration was not easy, but in the second half of the 1990s, stock markets converged toward full integration. In other words, their expected returns became increasingly determined by EU‐wide market risk and less by local risk (Gikas A. Hardouvelis, Dimitrios Malliaropulosa, Richard Priestleyd, 2007) Concluding, supporting evidence on the hypothesis that the >