Country pair-correlations as a measure of financial integration: the case of the Euro equity markets

Manuela Croci
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Manuela Croci: [n.a.]

No 201, Working Papers from Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali

Abstract: In 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.

Keywords: DCC model; euro equity markets; financial integration; pair-correlations (search for similar items in EconPapers)
JEL-codes: C32 C52 G1 G15 (search for similar items in EconPapers)
Pages: 37
Date: 2004-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:anc:wpaper:201

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