Measures Of Financial Integration Research Articles

Retail Interest Rate Differentials in the Eurozone: A Co-Integration Analysis Approach

Over the last decades, despite the remarkable progress toward the harmonization of banking regulation, interest rate differentials in the Eurozone remain large. In this context, rejecting the law of one price as a measure of financial integration, this paper applies the co-integration technique to investigate the presence of a long-run equilibrium relationship among retail interest rates. The data sample of the co-integration analysis conducted in this paper includes three (3) loan and two (2) deposit interest rates data sets from the 12 original Eurozone member countries for the time period 2000–2020, filling in that way the gap in the existing research by extending the application of this methodology to incorporate an updated database. The empirical findings of the paper provide evidence that in most of cases, there is a co-movement and a long-run equilibrium relationship between retail interest rates. On the basis of the co-integration approach, these findings are being perceived as a signal of retail banking market integration in the Eurozone.

How Does International Financial Integration Really Affect Post-Transition Countries' Growth? Empirical evidence from the CEE-10 countries

Abstract This paper seeks to empirically explore how an international financial integration influences a country’s GDP growth. The long run relationship is tested by PMG estimator for the sample of ten EU countries from Central, Eastern and Southeastern Europe (CEE-10 countries) between 1995 and 2017. Prior to the conducting of dynamic panel analysis based on PMG estimators, several panel unit root tests were conducted, as well as panel co integration tests. The findings offer mixed impact financial integration on growth. Among the measures of financial integration, growth of the CEE-10 countries is mostly driven in the long run by FDI inflows as well as remittances and financial openness. On the contrary, the study suggests a reversal relationship between growth and financial integration measured by Gross Foreign Assets and Liabilities in percentages of GDP. It might be explained with a fact that CEE-10 countries have not yet reached a certain level of financial development in order to benefit from financial integration. The study concludes that international financial integration does not per se enhance economic growth and country’s growth in the CEE-10 countries can be reached at a higher level of financial integration, further increase their financial openness and financial development.

Consumption smoothing, risk sharing and financial integration

AbstractTheories indicate that financial integration should allow economies to better share risk and thus improve consumption smoothing. We construct two widely used price‐based measures of financial integration (i.e., the standard correlation and the adjustedR‐squared) and test whether consumption volatility declines as international equity markets become more integrated. Pooled and panel estimates for three different groups of countries (i.e., G7, G20 and EU) provide no significant evidence of improved consumption smoothing as financial integration rises. This evidence is supported by a battery of robustness checks and holds over time. Taken together, our results suggest that convergence in international equity prices does not necessarily represent the channel through which risk‐sharing opportunities arise or consumption smoothing improves.

Co-movement in Stock Prices in Emerging Economies: The Case of the Caricom Region

ABSTRACTThe Grand Anse Declaration of 1989 recognised the need for financial integration within the emerging economies that comprise the CARICOM region, as a way of furthering the wider process of economic integration and, indeed, economic development in that region. Using co-movement as a measure of financial integration, this paper investigates the co-movement in stock prices among the Barbados, the Jamaica and the Trinidad and Tobago Stock Exchanges, the three major exchanges within the CARICOM region. It also examines how integrated these exchanges are with the New York Stock Exchange. The GARCH-Copula methodology and, to a lesser extent, estimated correlation coefficients, are used to attain this objective. There appears to be co-movement in stock prices and returns within the CARICOM stock markets and significant dependence structures between the returns of the three CARICOM stock markets. However, there is considerably less evidence of integration between the CARICOM markets and the New York Stock Exchange.

Indian Financial Integration: Evidence from the NDF Market

This study seeks to investigate the extent and causes of financial integration of India with the rest of the world during the sample period of January 2000 to October 2017. The study compares the interest rate which ought to prevail, with respect to the Non-Deliverable Forward (NDF) rate, in case of Covered Interest Parity and what actually does prevail. The difference between the Covered Interest Parity implied domestic interest rate and the actual domestic interest rate is our measure of financial integration. The study tries to find out different macroeconomic variables which affect the financial integration of India. The study used ordinary least squares, Johansen’s Cointegration technique along with VECM and Granger causality to unearth the long run and short run relationship of financial integration with plausible macroeconomic variables. We found India to be significantly non-integrated. Inflation volatility, changes in NEER and GDP along with Bank Rate and CRR were found to unequivocally influence financial integration of India. We also found structural break present in variables under study at June 2008.

Measuring Financial Fragmentation in the Euro Area Corporate Bond Market

This paper analyses the determinants of euro area non-financial corporate bonds over the last decade. We decompose the spread between the yield of German, French, Italian and Spanish corporate bonds vis-a-vis the German Bund of similar maturity into country, credit and duration risk premia components via dummy regressions. We highlight three main findings. First, the initial phase of the financial crisis (2008-2009) caused an overall increase in credit risk premia. Since the beginning of 2013 credit risk premia are back to levels comparable to those preceding the financial crisis. Second, at the height of the euro area sovereign crisis (2011-2012), high credit risk premia were accompanied by strong and persistent signs of market fragmentation in Italy and Spain (but not in France). This fragmentation has reached its peak in the second half of 2012 and has started to recede only after the announcement of the OMT. Third, we provide a simple measure of financial integration across the big 4 member states of the euro area.

A Network Visualization of Financial Integration and Credit Risk

This study relates financial integration to credit risk of banks in a panel of countries. Over the period of study, we compute measures of financial integration for a panel of banks and examine how they relate to the credit risk of borrowing banks. The result of an instrumental variable approach reveals that banks that engage in more borrowing in the international community do not help to alleviate credit risk state. In addition, borrowing banks that are more important in the network also help to compound credit risk. However, the closeness statistic reveals a significant reduction in credit risk of the borrowing banks such that banks that have independent access to other banks in the network are better positioned in reducing credit risk. The individual country analysis reveals that more borrowings by banks in the international community have different effects based on country of operation.

Financial Integration and Economic Growth in the COMESA and SADC Regions

This study used panel data methods to examine the relationship between financial integration and economic growth in the COMESA and SADC regions. Using Foreign direct investment (FDI) and portfolio flows as a share of GDP, Chinn-Ito index of financial openness and debt flows as measures of financial integration, the study found that the relationship between financial integration and growth is largely insignificant in the combined sample of COMESA and SADC regions. However, the relationship changes when the two regions are separated. Whereas two of the indicators of financial integration are significant in the COMESA region, only one indicator of financial integration is significant in the SADC region implying that financial integration is more important in the COMESA region than in the SADC region. The results support the growth retarding theories of financial globalization and the convergence hypothesis in the COMESA region while the neoclassical trade theories find strong support in the SADC region. These results imply, first, that financial integration has different growth effects for different regional groupings and thus integration policies should not be universally applied. Second, these results imply that further enhancement of trade integration policies offer more promising outcomes for economic growth in the SADC region than financial integration policies while the converse is true for the COMESA region.

Asian financial integration: Global or regional? Evidence from money and bond markets

This paper investigates the degree of global versus regional financial integration in Southeast Asia during the period 2004–2012. We examine integration in the money and bond markets in Asia by employing a covered-interest-parity-based measure of financial integration. The impact of the 2008 financial crisis as well as the recent regional bond initiatives on the integration process of Asian money and bond markets respectively are specifically investigated. Empirically, we adopt the Phillips and Sul (2007) convergence methodology that has not been previously employed to examine the integration process in Asian money and bond markets. We find evidence of both global and regional integration in the money market pre 2008 but once the crisis hit, the process of global integration comes to an abrupt halt. However, regional integration, albeit at a slower pace, is still clearly evident in the post-crisis period. As for the Asian bond market, evidence of both global and regional integration is found but, in comparison, the latter is more convergent post 2008. Regional integration is stronger when interest rates with longer maturity are considered. In addition, we identify some convergent subgroups of countries and this suggests that a multi-tiered style of convergence is present.

The precise form of financial integration: Empirical evidence for selected Asian countries

A noteworthy attribute of the empirical studies on financial integration is that many published papers rely on the approximate form of financial integration by studying the degree of regional financial integration. Therefore, the approximate form of financial integration cannot be used to refute the precision of the financial integration simply because of complex data collection procedures and the misspecification of a commonly used model. To overcome this shortcoming, this study uses the precise form to specify the measures of financial integration and examines the empirical validity based on a sample of ASEAN-5 countries plus 3 additional countries. Using the panel error correction method, the findings provide a number of policy implications; the precise form of financial integration can characterise the capital mobility conditions and the degree of sterilised foreign exchange intervention, and serve as a guiding policy instrument for fine-tuning the disruptions in the foreign capital market through sterilised foreign exchange intervention in exchange rate misalignments without abandoning the role of domestic interest rate policy that eventually promotes orderly financial integration.

International financial network characteristics as the measure of financial integration

The authors perform analysis of theoretical and empirical research on financial networks and disclose the peculiarities of network analysis application for evaluation of systemic financial integration. The analysed methods are tested on international portfolio investments network.

Financial Integration and Corporate Cash Holdings

Using a detailed measure of financial integration and firm level panel data for 46 countries, we examine the relation between financial integration and corporate cash holdings. Our evidence suggests that financial integration reduces firms’ overall reliance on cash by mitigating the distortions in capital markets. Specifically, we find that both cash holdings and the marginal value of cash are lower in more financially integrated emerging markets. These effects are more pronounced for financially dependent firms. We also look at if financial integration increases corporations’ dependence on cash during high contagion risk periods due to elevated macroeconomic uncertainty. Our findings suggest that the benefits of financial integration in extenuating frictions in external markets and thus reducing corporations’ reliance on cash holdings overcomes its potential costs of increasing precautionary savings during high uncertainty periods.

Bond Markets as Conduits for Capital Flows: How Does Asia Compare?

We use data on the extent to which residents of one country hold the bonds of issuers resident in another as a measure of financial integration or interrelatedness, asking how Asia compares with Europe and Latin America and with the base case in which the purchaser and issuer of the bonds reside in different regions. Not surprisingly, we find that Europe is more financially integrated than other regions. Asia, more interestingly, already seems to have made more progress on this front than Latin America and other parts of the world. The contrast with Latin America is largely explained by stronger creditor and investor rights, better contract enforcement, and greater transparency, all of which are conducive to foreign participation in local markets and to intraregional cross holdings of Asian bonds generally. Further results based on a limited sample suggest that one factor holding back investment in foreign bonds in East Asia may be limited geographical diversification by mutual funds, in turn reflecting a dearth of appropriate assets. Asian Bond Fund 2, by creating a passively managed portfolio of local currency bonds potentially attractive to mutual fund managers and investors, may help to relax this constraint.

Bond Markets As Conduits for Capital Flows: How Does Asia Compare?

We use data on the extent to which residents of one country hold the bonds of issuers resident in another as a measure of financial integration or interrelatedness, asking how Asia compares with Europe and Latin America and with the base case in which the purchaser and issuer of the bonds reside in different regions. Not surprisingly, we find that Europe is head and shoulders above other regions in terms of financial integration. More interesting is that Asia already seems to have made some progress on this front compared to Latin America and other parts of the world. The contrast with Latin America is largely explained by stronger creditor and investor rights, more expeditious and less costly contract enforcement, and greater transparency that lead to larger and better developed financial systems in Asia, something that is conducive to foreign participation in local markets and to intra-regional cross holdings of Asian bonds generally. Further results based on a limited sample suggest that one factor holding back investment in foreign bonds in East Asia may be limited geographical diversification by mutual funds, in turn reflecting a dearth of appropriate assets. Asian Bond Fund 2, by creating a passively managed portfolio of local currency bonds potentially attractive to mutual fund managers and investors, may help to relax this constraint.

Distinguishing Between Financial Openness and True Financial Integration: Results from a Multi-Country Study

The concept financial openness is differentiated from that of financial integration with a survey of literature, and with reference to country experiences. A ranking is made of different developed and developing countries in terms of various definitions of financial integration, including the Feldstein-Horioka coefficient. It is seen that the ranking is not – by any means – identical for different measures of financial integration. Evidently, mere opening up to capital flows will not bring about financial integration, which will be reflected in interest rate premiums. Tests are conducted for the dependence of the degree of integration on country-specific characteristics such as the degree of decentralization, credit market restrictions, degree of indebtedness, size, and the like.

European Financial Integration and Equity Returns: A Theory-Based Assessment

This paper reassesses, at the light of economic and financial theory, the well documented recent evolution of the euro area public debt and equity markets. Doing so leads to associating the EMU and the single market with the changes in fundamentals and financial integration with convergence in pricing. For the public debt market, we stress the observation, conform with predictions, that risk free interest rates are now less volatile in the euro area. But also the fact that the establishment of a single public debt market is still not completed. The current fragmentation is costly to Treasuries and tax payers and understanding its cause is important to evaluate the prospects of currently considered measures of financial integration. Theory predicted that the single currency would have a minor impact on equity markets since the currency component in euro area equity returns has historically been small. That the asset management industry has undergone a paradigmatic change, moving from a topdown country-based allocation to a top-down global sector-based allocation, is a puzzle in this light. A careful examination of the changing relative importance of country and industry factors for equity returns provides some weak rationale for the change in paradigm. A more complete assessment of the evolving nature of equity returns in terms of portfolio efficiency strengthens this evidence.

A Note on Consumption Correlations and European Financial Integration

In this paper we use empirical cross-country correlation coefficients of GDP and private consumption data as a measure of financial integration between the current EU-member states and the central and eastern European accession states. We find, that the so-called consumption correlation puzzle with high output correlations and considerably small(er) consumption correlations (just opposite to the theory of complete financial markets) does also and still exist among European countries, even using data-sets covering most recent time periods. Thus, there seems to be less financial market integration than often expected.

Systematic Elements in the Linkage of National Stock Market Indices

PpT HE purpose of this paper is to investigate the systematic covariation between stock prices in developed countries. Covariation may reflect causation or it may indicate similar reactions to external stimuli. Causal relationships may be lasting or temporary and may accordingly result in sustained periods or in rather brief periods of covariation. For example, developments in the Canadian stock market are continuously influenced by those in the United States stock market. An example of the second type of causal covariation is the relationship between Japanese and United States stock prices in mid-1970. Because of a decline in United States stock prices at this time and the liquidity needs of large institutional investors in the United States, it was necessary for these investors to reduce their holdings of foreign assets.1 The reduction of their investment in Japanese equities resulted in an outflow of capital from Japan and stimulated a decline in Japanese equity prices. For markets outside the United States, the introduction of the Interest Equalization Tax by the United States in mid-1963 is an example of an external development that caused similar responses in several stock markets. This measure caused many stock indices to decline, especially those in Japan and Canada. To the extent that stock prices reflect domestic economic conditions and conditions are similar across countries, stock prices will show systematic covariation that is a result of developments external to the national stock markets. Covariation between stock prices in different countries is of interest to individual investors who wish to allocate their investment portfolios so as to maximize the rates of return on their portfolios for a given risk. The return on stock consists of the dividend paid on the stock and the change in the price of the stock. For most stocks the price is more variable than the dividend so that price movements account for a larger part of the change in the rate of return. Thus investors seeking effective portfolio diversification wish to determine the countries whose stock prices move together, those whose stock prices move in opposite directions, and those whose stock price movements are unrelated to one another. Covariation between stock prices in different countries is of interest to the forecaster and policy maker because stock movements affect domestic consumption and investment expenditures. The wealth of consumers is affected by changes in stock prices and changes in wealth affect consumption decisions. The mechanism through which stock price changes affect investment decisions is more complex, but the influence of these changes may still be significant. An economist is frequently interested in establishing the extent to which financial markets are integrated or the extent to which developments in one market are reflected in the developments in a second market. Measures of financial integration are traditionally based on the dispersion of interest rates between markets, with a smaller dispersion measure corresponding to a higher degree of integration.2 This study concentrates exclusively on the covariation between equity prices as a measure of integration since aggregate information on dividend payments is not available for most countries. In an attempt to measure the extent of covariation between national stock markets and to isolate and identify the patterns of linkage Received for publication June 28, 1972. Revision accepted for publication January 12, 19,73. * The views expressed in this paper are those of the author and not necessarily those of the International Monetary Fund. 1Legal constraints on the share of a United States institution's portfolio that may be invested in foreign assets may also have influenced the repatriation of portfolio capital. 2See R. N. Cooper, Towards an International Capital Market?, Center Discussion Paper number 68, Economic Growth Center, Yale University, July 1969. The question of the integration of national stock markets is briefly raised but is not pursued because price earnings ratios are not available in many countries.