Measuring Financial Integration: Lessons from the Correlation

41 Pages Posted: 13 Jul 2015

See all articles by Monica Billio

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia

Antonio Paradiso

Ca Foscari University of Venice - Dipartimento di Economia

Michael Donadelli

Leibniz Institute for Financial Research SAFE

Max Riedel

Leibniz Institute for Financial Research SAFE

Date Written: July 8, 2015

Abstract

This paper evaluates and compares the dynamics of the financial integration process as described by different empirical approaches. To this end, a wide range of methods accounting for several dimensions of integration and a novel evaluation scheme – based on the positive association between financial integration and real exchange rate volatility – are employed. Using monthly equity market data running from April 1985 to December 2014 for two groups of countries, we find that (i) the degree of heterogeneity among the patterns generated by the proposed set of financial integration measures is rather low and (ii) the standard unconditional correlation – on average – captures equity market integration rather well and performs – in the worst case – as more sophisticated integration measures.

Keywords: Equity market integration, dynamic correlation, principal components, RER volatility

JEL Classification: F15, F44, G15

Suggested Citation

Billio, Monica and Paradiso, Antonio and Donadelli, Michael and Riedel, Max, Measuring Financial Integration: Lessons from the Correlation (July 8, 2015). University Ca' Foscari of Venice, Dept. of Economics Working Paper Series No. 23/WP/2015. Available at SSRN: https://ssrn.com/abstract=2629906 or http://dx.doi.org/10.2139/ssrn.2629906

Monica Billio (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

Antonio Paradiso

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Michael Donadelli

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Max Riedel

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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