Measuring Financial Integration: Lessons from the Correlation
41 Pages Posted: 13 Jul 2015
Date Written: July 8, 2015
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: Suggested Citation