Estimation of International Financial Integration: Evidence from European Countries

In the current state of the economy, securities and trade flows between countries exist fluently, however, such channels of flow do not completely map one-to-one without some attenuation, thereby preventing the notion of complete financial markets. This paper develops the econometric framework to identify the parameter which measures the degree of (imperfect) international risk-sharing, and employs nonlinear econometric methods to estimate for the values of the parameter across European countries. Our findings show how simple econometric methods can give a sensible measure of this risk-sharing, which can be used as a basis for economic model calibrations when solving DSGE models. Moreover, this paper lays the groundwork for the possibility of implementing further sophisticated nonlinear estimations to improve upon the measures already computed.