The impact of bank money on stock market integration: evidence from the Eurozone

This paper explores the impact of monetary policy on the integration of the equity markets of the five largest economies of the Eurozone. We show that a rise in leverage and accommodating monetary policies significantly affects the probability of simultaneous stock market crashes. Moreover, we find that an increasing loan-to-base ratio divergence has a destabilizing effect on equity markets. Our findings are instrumental for international investors, who might operate under the assumption that Eurozone stock markets exhibit stable correlations during non-crisis periods, bolstered by the prevailing monetary regime. We suggest implementing a probability threshold as a macroprudential tool to manage latent correlations and ensure effective risk management.