Evaluating Financial Integration in Euro Area Stock Markets with Return and Performance Dispersion Indices

Abstract

This paper presents indices of return and performance dispersion between ten developed domestic stock markets of the euro area to assess progress in their integration since the launch of the single currency. This approach is based on previous literature according to which domestic financial market integration results in greater similarity between the performance of these financial markets. The performance measures used are time varying Treynor ratios based on beta coefficients given by estimations of DCC MGARCH models relating each domestic market stock price index to the EMU area market stock price index. Cross-section dispersion measures (CSDM) are calculated daily for return and performance of the domestic markets. The calculation of CSDM supports the construction of return and performance dispersion indices which show the evolution of the integration of this group of domestic markets.