Which Market Integration Measure?

SAFE Working Paper No. 159

Forthcoming, Journal of Banking and Finance

62 Pages Posted: 13 Dec 2016

See all articles by Monica Billio

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia

Michael Donadelli

Leibniz Institute for Financial Research SAFE

Antonio Paradiso

Ca Foscari University of Venice - Dipartimento di Economia

Max Riedel

Leibniz Institute for Financial Research SAFE

Date Written: December 12, 2016

Abstract

This paper compares the dynamics of the financial integration process as described by different empirical approaches. To this end, a wide range of measures accounting for several dimensions of integration is employed. In addition, we evaluate the performance of each measure by relying on an established international finance result, i.e., increasing financial integration leads to declining international portfolio diversification benefits. Using monthly equity market data for three different country groups (i.e., developed markets, emerging markets, developed plus emerging markets) and a dynamic indicator of international portfolio diversification benefits, we find that (i) all measures give rise to a very similar long-run integration pattern; (ii) the standard correlation explains variations in diversification benefits as well or better than more sophisticated measures. These Findings are robust to a battery of robustness checks.

Keywords: Equity market integration, dynamic correlation, principal components, international diversification benefits

JEL Classification: F15, F44, G15

Suggested Citation

Billio, Monica and Donadelli, Michael and Paradiso, Antonio and Riedel, Max, Which Market Integration Measure? (December 12, 2016). SAFE Working Paper No. 159, Forthcoming, Journal of Banking and Finance, Available at SSRN: https://ssrn.com/abstract=2883995 or http://dx.doi.org/10.2139/ssrn.2883995

Monica Billio

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

Cannaregio 873
Venice, 30121
Italy

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

Michael Donadelli (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

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

Antonio Paradiso

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

Cannaregio 873
Venice, 30121
Italy

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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