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Measuring time-varying financial market integration: An unobserved components approach

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  • Berger, Tino
  • Pozzi, Lorenzo

Abstract

We measure the time-varying degree of world stock market integration of five developed countries (Germany, France, UK, US, and Japan) over the period 1970:1–2011:10. Time-varying financial market integration of each country is measured through the conditional variances of the country-specific and common international risk premiums in equity excess returns. The country-specific and common risk premiums and their conditional variances are estimated from a latent factor decomposition through the use of state space methods that allow for GARCH errors. Our empirical results suggest that stock market integration has increased over the period 1970:1–2011:10 in all countries but Japan. And while there is a structural increase in stock market integration in four out of five countries, all countries also exhibit several shorter periods of disintegration (reversals), i.e. periods in which country-specific shocks play a more dominant role. Hence, stock market integration is measured as a dynamic process that is fluctuating in the short run while gradually increasing in the long run.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 2 ()
Pages: 463-473

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:463-473

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Financial markets; Integration; Factor model; Unobserved component; GARCH;

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References

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Cited by:
  1. Khaled Guesmi & Frédéric Teulon, 2014. "Equity Market Integration and Currency Risk: Empirical Evidence for Indonesia," Working Papers 2014-096, Department of Research, Ipag Business School.
  2. Abid, Ilyes & Kaabia, Olfa & Guesmi, Khaled, 2014. "Stock market integration and risk premium: Empirical evidence for emerging economies of South Asia," Economic Modelling, Elsevier, vol. 37(C), pages 408-416.

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