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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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  • Berger, Tino & Pozzi, Lorenzo, 2013. "Measuring time-varying financial market integration: An unobserved components approach," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 463-473.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:463-473
    DOI: 10.1016/j.jbankfin.2012.09.015
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    15. MOSCALU, Maricica, 2015. "Financial Integration In The Euro Area And Smes’ Access To Finance: Evidence Based On Aggregate Survey Data," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 19(2), pages 51-66.
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    More about this item

    Keywords

    Financial markets; Integration; Factor model; Unobserved component; GARCH;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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