This paper presents an analysis of Euro-zone nancial markets based on a joint assessment of bonds, stocks and stock-bond correlations between groups of Euro-zone countries. The quarterly component of dynamic correlations indicates the divergence of integration in Europe and highlights the heterogeneity in these markets. Panel regressions on these dynamic correlations, controlling for unobserved heterogeneity, o er new insights into the role of macro-economic determinants of nancial markets between assets and regions. This combined analysis of markets provides evidence on the importance of macro-economic factors such as in ation, uncertainty, debt, current account and economic growth in European nancial integration. These factors may be overlooked when analysing a single market for individual pairs of countries. As a result we nd that the robust role of economic fundamentals in European nancial market correlations points to the need for European economic integration based on sound macro-economic fundamentals for both current and future Euro-zone members.
