Has financial market integration increased during the nineties?

Abstract

This paper analyses whether there has been an increase in the degree of financial market integration during the nineties. To do this, we focus on stock markets and compute, first, a number of standard measures of co-movements that sometimes are interpreted as measures of financial integration. In our view, they only measure financial market linkages. In any case, this analysis allows us to make a more formal assessment of the actual increase in linkages and, at the same time, highlights the shortcomings of these measures of financial market integration. In the second part of the paper we compute two alternative measures of market integration based on a refinement of the approach suggested by Chen and Knez (1995). The main advantage of this approach is that it relies on the condition of absence of arbitrage opportunities-which is directly related to the idea that more integration means less barriers to trade across markets-and does not depend on any particular asset pricing model. The evidence found suggests that during the nineties there has been an increase of the degree of market integration between stock markets. * Paper prepared for the Autumn Central Bank Economist's Meeting held at the BIS on the 25 and 26 October 1999. We wish to thank Francisco Alonso for outstanding research assistance, and Enrique Alberola, José Luis Escrivá, Jorge Martínez and participants in the BIS' Meeting and in the internal seminar at the Banco de España for very helpful comments and suggestions. Perhaps the simplest approach in the literature to analyse the degree of market integration is that based on the computation of the correlation between returns on those markets that are thought to be more integrated than previously 1. This approach is based on rather simple intuition: the more integrated markets are, the higher the co-movement between their prices. In this respect, Table 1 shows the correlation between weekly returns on seven selected stock exchanges-New York, London, Paris, Madrid, Frankfurt, Milan and Tokyo 2during the 1990-1994 and the 1995-1999 periods. In 15 out of the 21 possible combinations, correlation has increased in the second half of the nineties, with the Japanese stock exchange accounting for the remaining 6 cases. On average, the correlation between the returns on these stock exchanges increased from .

An analysis of returns and volatility spillovers and their determinants in emerging Asian and Middle Eastern countries

“…Recent literature, however, has documented a notable increase in international co-movement of equity returns since the mid-1990s. Various explanations have been offered for this increased market integration, including the increase in international market co-movement linked to growing global industry factors (Baca et al, 2000;Cavaglia et al, 2000), high market correlation after the stock market bubble in the late 1990s (Brooks and Del Negro, 2004), a general increase in market integration in the 1990s and the 2000s (Ayuso and Blanco, 2001) and an increase in international bilateral trade flows (Pretorius, 2002).…”

Tributación y la cultura empresarial en la competencia del Mercado Integrado Latinoamericano

“…En un mercado como el MILA, la integración es entendida como una en la que no hay barreras de ninguna clase para las transacciones transfronterizas (Ayuso & Blanco, 2001), como un lugar donde no hay ni prevalece la ley del arbitraje (Federico, 2007), los activos de idénticos tipos de riesgo esperan retornos similares independientes de su domicilio (Bekaert & Harvey, 2003), y a la vez, muestran el mismo riesgo ajustado a los rendimientos esperados (Lence & Falk, 2005). Es un estado en el que diferentes mercados de capitales brindan a los inversionistas oportunidades de inversión en un portafolio más amplio de activos bajo una misma expectativa de riesgo y rentabilidad, ya que comparten factores de riesgo en común y; a la vez, no se da lugar al arbitraje.…”

How Integrated Are the European Retail Financial Markets? A Cointegration Analysis

“…-Arbitrage pricing theory (Ferson/Harvey, 1991, Bekaert/Harvey, 1995, Dumas/ Solnik, 1995, Hardouvelis et al, 1999 -Distance between sets of stochastic discount factors (Chen/Knez, 1995, Ayuso/Blanco, 2000 Saving-Investment-Correlations (Feldstein/Horioka, 1980, Feldstein, 1982, Obstfeld, 1985, Summer, 1988, Sinn, 1992, Taylor, 1994 Consumption-Correlations (Obstfeld, 1989, 1994, Mace, 1991, Bayoumi/MacDonald, 1995, Olivei, 2000 (Centeno/ Mello, 1999, Kleimeier/Sander, 2000, Sander/Kleimeier, 2001) (Stigler/Sherwin, 1985, Keeley/Zimmerman, 1985, Berger/ Hannan, 1989, Hannan, 1991, Hannan/ Berger, 1991, Neumark/Sharpe, 1992, Jackson, 1992, Rhoades, 1992, Radecki, 1998, Heitfield, 1999 -"Micro Home Bias Literature" (Tesar/Werner, 1992, Lewis, 1999, Hess/Shin, 2000 Another quantity approach looks at correlations between consumption across countries (Obstfeld, 1989). 4 When markets are fully integrated individuals are able to ensure themselves against unexpected changes in their income streams stemming from regional shocks by diversifying their portfolio holdings.…”