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Learning about Financial Market Integration from Principal Components Analysis

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  • Vadym Volosovych

Abstract

Using principal components analysis, I examine capital market integration of 15 industrialized economies from 1875 to 2009. The methodology accounts for several dimensions of integration (markets comovement and segmentation) and delivers more credible conclusions concerning the patterns of financial integration than conventional techniques (for example, simple correlations). Patterns of both nominal and real returns on long-term government bonds imply a higher level of integration by the end of the 20th century compared to earlier periods. Policy variables, common shocks, and the global market environment play a role in explaining the time variation in integration, while 'unexplained' changes in the overall level of country risk are also empirically important. (JEL codes: F02, F36, G15, N20) Copyright The Author 2012. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Vadym Volosovych, 2013. "Learning about Financial Market Integration from Principal Components Analysis," CESifo Economic Studies, CESifo Group, vol. 59(2), pages 360-391, June.
    • Handle: RePEc:oup:cesifo:v:59:y:2013:i:2:p:360-391
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifs003
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    Citations

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    Cited by:

    1. Nagayasu, Jun, 2015. "Global and country-specific factors in real effective exchange rates," MPRA Paper 64217, University Library of Munich, Germany.
    2. Donadelli, M. & Gufler, I. & Paradiso, A., 2024. "Financial market integration: A complex and controversial journey," International Review of Financial Analysis, Elsevier, vol. 92(C).
    3. Rughoo, Aarti & You, Kefei, 2016. "Asian financial integration: Global or regional? Evidence from money and bond markets," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 419-434.
    4. Qin, Weiping & Cho, Sungjun & Hyde, Stuart, 2022. "Measuring market integration during crisis periods," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    5. Donadelli, Michael & Paradiso, Antonio, 2014. "Is there heterogeneity in financial integration dynamics? Evidence from country and industry emerging market equity indexes," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 184-218.
    6. Nitsch, Volker & Berger, Helge, 2015. "Measuring Economic and Institutional Integration," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 79456, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    7. Jun Nagayasu, 2013. "Co-movements in real effective exchange rates: evidence from the dynamic hierarchical factor model," Working Papers 1318, University of Strathclyde Business School, Department of Economics.
    8. Monica Billio & Michael Donadelli & Antonio Paradiso & Max Riedel, 2015. "Measuring Financial Integration: Lessons from the Correlation," Working Papers 2015:23, Department of Economics, University of Venice "Ca' Foscari".
    9. Billio, M. & Donadelli, M. & Paradiso, A. & Riedel, M., 2017. "Which market integration measure?," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 150-174.
    10. Nagayasu, Jun, 2016. "Commonality and Heterogeneity in Real Effective Exchange Rates: Evidence from Advanced and Developing Countries," MPRA Paper 70078, University Library of Munich, Germany.
    11. Raffaella Calabrese & Claudia Girardone & Alex Sclip, 2021. "Financial fragmentation and SMEs’ access to finance," Small Business Economics, Springer, vol. 57(4), pages 2041-2065, December.
    12. Caporale, Guglielmo Maria & You, Kefei & Chen, Lei, 2019. "Global and regional stock market integration in Asia: A panel convergence approach," International Review of Financial Analysis, Elsevier, vol. 65(C).

    More about this item

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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