JOURNAL OF THE JAPANESE AND INTERNATIONAL ECONOMIES 12, 406–423 (1998) ARTICLE NO. JJ980412 The Euro and International Equity Flows* Richard Portes London Business School and CEPR, Sussex Place, Regent’s Park, London NW1 4SA, United Kingdom and He ´le `ne Rey London School of Economics, London WC2 2AE, United Kingdom Received July 8, 1998; revised September 9, 1998 Portes, Richard, and Rey, He ´le `ne—The Euro and International Equity Flows We use a new panel data set on bilateral gross cross-border equity ﬂows between 14 countries. We ﬁt a ‘‘gravity model’’ to these data and a strictly comparable set of data for manufactures trade between these countries. The results are strikingly similar, although the coefﬁcient on the distance variable is lower for equity than for trade ﬂows (but still highly signiﬁcant). We use the results to throw some light on the likely consequences of unifying the European equity markets. J. Japan. Int. Econ. December 1998, 12(4), pp. 406–423. London Business School and CEPR, Sussex Place, Regent’s Park, London NW1 4SA, United Kingdom and London School of Economics, London WC2 2AE, United Kingdom.  1998 Academic Press Journal of Economic Literature Classiﬁcation Numbers F21, F3. 1. INTRODUCTION The economic motivation for the monetary uniﬁcation of Europe has always stressed primarily its effects in the goods markets (European Com- mission, 1990): the reduction of transactions costs, the elimination of ex- * This paper arises out of the TRIO conference (Tokyo Center for Economic Research, Centre for Economic Policy Research, and National Bureau of Economic Research) in Tokyo, 19–20 December 1997. We are grateful to Takatoshi Ito for his encouragement and forbear- ance, and we have received outstanding research assistance from Gino Cateau. Angela Cozzini of Cross Border Capital very kindly provided the data on equity investment ﬂows, and Giovanni Urga gave helpful comments. 406 0889-1583/98 $25.00 Copyright  1998 by Academic Press All rights of reproduction in any form reserved.