Financial Integration of New EU Member States
46 Pages Posted: 15 Mar 2006
Date Written: December 2005
This study assesses the degree of economic and financial integration for a selected number of new EU member states between themselves and with the euro zone. Within the framework of a factor model for market returns, we adopt an intuitive measure of integration: the higher the amount of return variance explained by the global factor relative to the local components, the higher the degree of integration. Next we derive a relationship between return correlation and the measure of integration. Economic and financial integration is measured with a regression quantile-based methodology and a variance decomposition approach. When analysing equity markets, evidence suggests that for Czech Republic, Hungary and Poland the degree of integration has increased significantly over the last few years. This is not the case for Cyprus, Estonia, Latvia and Slovenia. As for the government bond markets, we do not observe a significant increase in integration.
Keywords: Integration, new EU member states, regression quantile, variance decomposition
JEL Classification: C32, F30, G12
Suggested Citation: Suggested Citation