Country pair-correlations as a measure of financial integration: the case of the Euro equity markets
AbstractIn financial economics, co-movements between equity returns are generally interpreted as a measure of equity market integration. In line with this idea, the paper investigates whether the euro equity markets have become less segmented over the last decade referring to three different estimates of pair-correlations, i.e. unconditional correlations, ex-post rolling estimates of correlations and dynamic conditional correlations (DCC). The analysis shows that pair-correlations within the euro area have indeed increased, suggesting higher financial integration of the euro equity markets. Additionally, the paper addresses the related issue of which factors have driven this integration process. The idea is that the extent of market integration may depend upon certain macroeconomic factors, that influence the degree of economic integration across countries, and upon the elimination of exchange rate volatility associated with Stage Three of EMU. The findings show that the increase in integration is explained by the relaxation of restrictions to capital mobility and of institutional barriers and by the economic convergence in Europe, while Stage Three of EMU has not further boosted integration.
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Bibliographic InfoPaper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 201.
Date of creation: Jan 2004
Date of revision:
DCC model; euro equity markets; financial integration; pair-correlations;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- G1 - Financial Economics - - General Financial Markets
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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