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A New Test of International Financial Integration with Application to the European Union

Author

Listed:
  • J. Holmes, Mark

    (Loughborough University)

  • J. Pentecost, Eric

    (Loughborough University)

Abstract

In this paper we test for financial integration among the major European Union countries using a new test, due to Snell(1996), which allows us to confirm or reject covered interest rate parity. Indeed, we offer a new distinction between strong or weak financial integrtion depending on whether or not the frist largest principal component based on deviations from covered interest parity is stationary. Despite the turbulence in the ERM during the early 1990s, we find evidence of increased financial inter-dependence of on shore domestic interest rates implying that European monetary polices are in general converging.

Suggested Citation

  • J. Holmes, Mark & J. Pentecost, Eric, 1999. "A New Test of International Financial Integration with Application to the European Union," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 14, pages 1-12.
    • Handle: RePEc:ris:integr:0094
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    Citations

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    Cited by:

    1. Buch, Claudia M., 2001. "Cross-Border Banking and Transmission Mechanisms: The Case of Europe," Kiel Working Papers 1063, Kiel Institute for the World Economy (IfW Kiel).
    2. Ferreira, Paulo & Kristoufek, Ladislav, 2017. "What is new about covered interest parity condition in the European Union? Evidence from fractal cross-correlation regressions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 486(C), pages 554-566.
    3. J. Vineesh Prakash & D. K. Nauriyal & Sandeep Kaur, 2017. "Assessing Financial Integration of BRICS Equity Markets: An Empirical Analysis," Emerging Economy Studies, International Management Institute, vol. 3(2), pages 127-138, November.
    4. Holmes, Mark J., 2001. "Some new evidence on exchange rates, capital controls and European Union financial integration," International Review of Economics & Finance, Elsevier, vol. 10(2), pages 135-146.
    5. Claudia Buch, 2004. "Cross-border banking and transmission mechanisms in Europe: evidence from German data," Applied Financial Economics, Taylor & Francis Journals, vol. 14(16), pages 1137-1149.

    More about this item

    Keywords

    International; Financial; Integration;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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