Learning about Financial Market Integration from Principal Components Analysis

Vadym Volosovych

CESifo Economic Studies, 2013, vol. 59, issue 2, 360-391

Abstract: Using principal components analysis, I examine capital market integration of 15 industrialized economies from 1875 to 2009. The methodology accounts for several dimensions of integration (markets comovement and segmentation) and delivers more credible conclusions concerning the patterns of financial integration than conventional techniques (for example, simple correlations). Patterns of both nominal and real returns on long-term government bonds imply a higher level of integration by the end of the 20th century compared to earlier periods. Policy variables, common shocks, 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. (JEL codes: F02, F36, G15, N20) Copyright The Author 2012. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

Date: 2013
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