European Union Enlargement and Equity Markets in Candidate Countries ( incomplete draft )

The announcement of European Union enlargement coincided with a dramatic rise in stock prices in accession countries. This paper investigates the hypothesis that the rise in stock prices was the result of the integration of accession countries into the world market, and the subsequent repricing of systematic risk. The results show that firm-specific stock price changes are not related to firmspecific changes in systematic risk. This implies that either integration did not occur upon the announcement, or that market integration is not correctly priced. The lack of repricing of systematic risk suggests that the risk sharing benefits of capital market integration are not reflected in the equity cost of capital.