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Measuring Financial Market Integration over the Long Run: Is there a U-Shape?

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  • Vadym Volosovych

    (Erasmus University Rotterdam)

Abstract

See also a publication with a similar title in 'Journal of International Money and Finance' , 30(7), 1535-61. Using long time series for sovereign bond markets of fifteen industrialized economies from 1875 to 2009, I find that financial market integration by the end of the 20th century was higher than in earlier periods and exhibited a J-shaped trend with a trough in the 1920s. The main reason for the higher financial integration seen today is the recent extensive globalization. Around the turn of the 20th century, countries frequently drifted apart. Conversely, in recent years, the bond markets of most countries have moved together. Both policy variables and the global market environment play a role in explaining the time variation in integration, while 'unexplained' changes in the overall level of country risk are also empirically important. My methodology, based on principal components analysis, is immune to outliers and accounts for global and country-specific shocks and, hence, can capture trends in financial integration more accurately than standard techniques such as simple correlations.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-018/2.

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Date of creation: 31 Jan 2011
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Handle: RePEc:dgr:uvatin:20110018

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Keywords: financial markets integration; principal components; sovereign bonds;

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Cited by:
  1. Shawkat Hammoudeh & Duc Khuong Nguyen & Juan Carlos Reboredo & Xiaoqian Wen, 2014. "Dependence of stock and commodity futures markets in China: implications for portfolio investment," Working Papers 2014-561, Department of Research, Ipag Business School.
  2. Guglielmo Maria Caporale & Michael Donadelli & Alessia Varani, 2014. "International Capital Markets Structure, Preferences and Puzzles: The US-China Case," Discussion Papers of DIW Berlin 1362, DIW Berlin, German Institute for Economic Research.
  3. Khalid Kisswani & Salah Nusair, 2014. "Nonlinear convergence in Asian interest and inflation rates: evidence from Asian countries," Economic Change and Restructuring, Springer, Springer, vol. 47(3), pages 155-186, August.

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