Measuring financial integration in the euro area

Home
/
Papers
/
Measuring financial integration in the euro area

Posted Content•

Measuring financial integration in the euro area

Lieven Baele, Annalisa Ferrando, Peter Hördahl, Elizaveta Krylova, Cyril Monnet - Show less +1 more

01 May 2004-Research Papers in Economics (Frankfurt a. M.: European Central Bank (ECB))-

TL;DR: In this paper, the authors present a set of specific measures to quantify the state and evolution of financial integration in the euro area, namely the money, corporate bond, government bond, credit and equity markets.

read less

Abstract: In this paper, we present a set of specific measures to quantify the state and evolution of financial integration in the euro area. Five key markets are considered, namely the money, corporate bond, government bond, credit and equity markets. Building upon the law of one price, we developed two types of indicators that can be broadly categorised as price-based and news-based measures. We complemented these measures by a number of quantity-based indicators, mainly related to the evolution of the home bias. Results indicate that the unsecured money market is fully integrated, while integration is reasonably high in the government and corporate bond market, as well as in the equity markets. The credit market is among the least integrated, especially in the short-term segment.

...read moreread less

Citations

PDF

Open Access

More filters

Posted Content•

Volatility Spillover Effects in European Equity Markets

[...]

Lieven Baele¹•Institutions (1)

Ghent University¹

01 Aug 2003-Research Papers in Economics

TL;DR: In this article, the authors quantified the magnitude and time-varying nature of volatility spillovers from the aggregate European (EU) and US market to 13 local European equity markets.

...read moreread less

Abstract: This paper quantifies the magnitude and time-varying nature of volatility spillovers from the aggregate European (EU) and US market to 13 local European equity markets. I develop a shock spillover model that decomposes local unexpected returns into a country specific shock, a regional European shock, and a global shock from the US. The innovation of the model is that regime switches in the shock spillover parameters are accounted for. I find that these regime switches are both statistically and economically important. While both the EU and US shock spillover intensity has increased over the 1980s and 1990s, the rise is more pronounced for EU spillovers. For most countries, the largest increases in shock spillover intensity are situated in the second half of 1980s and the first half of the 1990s. Increased trade integration, equity market development, and low inflation are shown to have contributed to the increase in EU shock spillover intensity. Finally, I find some evidence for contagion from the US market to a number of local European equity markets during periods of high world market volatility.

...read moreread less

526 citations

Interbank exposures: an empirical examination of systemic risk in the

[...]

Hans Degryse, Grégory Nguyen

01 Jan 2004

376 citations

Journal Article•DOI•

European banking: An overview

[...]

John Goddard¹, Philip Molyneux¹, John O. S. Wilson², Manouche Tavakoli²•Institutions (2)

Bangor University¹, University of St Andrews²

01 Jul 2007-Journal of Banking and Finance

TL;DR: In this paper, the authors reviewed the recent academic literature on developments in European banking and concluded that European banking markets have become increasingly integrated in recent years, but barriers to full integration, especially in retail banking, still remain.

...read moreread less

Abstract: Against a background of far-reaching structural change in the banking sector, this article reviews the recent academic literature on developments in European banking. European banking markets have become increasingly integrated in recent years, but barriers to full integration, especially in retail banking, still remain. European integration has possible implications for systemic risk, and poses various challenges for the current supervisory framework. The banks’ responses to the changing competitive environment include the pursuit of strategies of diversification, vertical product differentiation and consolidation. European integration has implications for competition in banking markets, for the nature of long-term borrower-lender relationships, and for the relationships between ownership structure, technological change and bank efficiency. The article concludes by reviewing recent literature on the credit channel in the monetary transmission mechanism, and interest rate pass-through.

...read moreread less

336 citations

Journal Article•DOI•

Interbank Exposures: An Empirical Examination of Systemic Risk in the Belgian Banking System

[...]

Hans Degryse¹, Hans Degryse², Grégory Nguyen³•Institutions (3)

Katholieke Universiteit Leuven¹, Economic Policy Institute², National Bank of Belgium³

02 Mar 2004-Social Science Research Network

TL;DR: In this paper, the authors investigated the evolution and determinants of contagion risk for the Belgian banking system over the period 1993-2002 using detailed information on aggregate interbank exposures of individual banks, large bilateral interbank exposure, and cross-border interbanks exposures.

...read moreread less

Abstract: Robust (cross-border) interbank markets are important for the well functioning of modern financial systems. Yet, a network of interbank exposures may lead to domino effects following the event of an initial bank failure. We investigate the evolution and determinants of contagion risk for the Belgian banking system over the period 1993-2002 using detailed information on aggregate interbank exposures of individual banks, large bilateral interbank exposures, and cross-border interbank exposures. The structure of the interbank market affects contagion risk. We find that a change from a complete structure (where all banks have symmetric links) towards a "multiple money centre" structure (where money centres are symmetrically linked to otherwise disconnected banks) has decreased the risk and impact of contagion. In addition, an increase in the relative importance of cross-border interbank exposures has lowered local contagion risk. Yet, this reduction may have been compensated by an increase in contagion risk stemming from foreign banks.

...read moreread less

294 citations

Posted Content•

Endogeneities of Optimum Currency Areas: What brings Countries Sharing a Single Currency Closer Together?

[...]

Paul De Grauwe¹, Paul De Grauwe², Paul De Grauwe³, Francesco Paolo Mongelli⁴, Francesco Paolo Mongelli⁵ - Show less +1 more•Institutions (5)

London School of Economics and Political Science¹, Economic Policy Institute², Ifo Institute for Economic Research³, European Central Bank⁴, Goethe University Frankfurt⁵

01 Apr 2005-Social Science Research Network

TL;DR: In this article, the authors bring together several strands of the literature on the endogenous effects of monetary integration: i.e., whether sharing a single currency may set in motion forces bringing countries closer together.

...read moreread less

Abstract: This paper brings together several strands of the literature on the endogenous effects of monetary integration: i.e., whether sharing a single currency may set in motion forces bringing countries closer together. The start of EMU has spurred a new interest in this debate. Four areas are analysed: the endogeneity of economic integration, in which we look primarily at evidence on prices and trade; the endogeneity of financial integration or equivalently of insurance schemes based on capital markets; the endogeneity of symmetry of shocks; and the endogeneity of product and labour market flexibility. We present diverse arguments and, where possible, explore the incipient empirical literature focussing on the euro area. Our preliminary conclusion is one of moderate optimism. The different endogeneities that exist in the dynamics towards optimum currency areas are at work. How strong these endogeneities are and how quickly they will do their work remains to be seen.

...read moreread less

289 citations

1
2
3
4
…
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135

Collapse

References

PDF

Open Access

More filters

Book•DOI•

Financial development and economic growth : views and agenda

[...]

Ross Levine¹, Ross Levine²•Institutions (2)

National Bureau of Economic Research¹, University of California, Berkeley²

30 Nov 1999-Social Science Research Network

TL;DR: The authors argued that the preponderance of theoretical reasoning and empirical evidence suggests a positive first-order relationship between financial development and economic growth, and that financial development level is a good predictor of future rates of economic growth.

...read moreread less

Abstract: The author argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth. There is evidence that the financial development level is a good predictor of future rates of economic growth, capital accumulation, and technological change. Moreover, cross-country, case-style, industry level and firm-level analysis document extensive periods when financial development crucially affects the speed and pattern of economic development. The author explains what the financial system does and how it affects, and is affected by, economic growth. Theory suggests that financial instruments, markets and institutions arise to mitigate the effects of information and transaction costs. A growing literature shows that differences in how well financial systems reduce information and transaction costs influence savings rates, investment decisions, technological innovation, and long-run growth rates. A less developed theoretical literature shows how changes in economic activity can influence financial systems. The author advocates a functional approach to understanding the role of financial systems in economic growth. This approach focuses on the ties between growth and the quality of the functions provided by the financial systems. The author discourages a narrow focus on one financial instrument, or a particular institution. Instead, the author addresses the more comprehensive question: What is the relationship between financial structure and the functioning of the financial system?

...read moreread less

5,967 citations

"Measuring financial integration in ..." refers background in this paper

...…investigations point in the same direction: the functioning of financial systems is vitally linked to economic growth” (p.689-690).8 However, while Levine (1997) recognises the positive relationship between economic growth and financial development, he is careful not to infer any causality....
[...]
...These channels are quantitatively important, as Levine (1997) stresses, “While many gaps remain, broad cross-country comparisons, individual country studies, industry-level analyses, and firm-level investigations point in the same direction: the functioning of financial systems is vitally linked to…...
[...]
...The link between financial development and financial integration is of the utmost importance, as there is strong evidence that financial development is linked with economic growth.7 As described in Levine (1997), financial systems serve some basic purposes....
[...]

Posted Content•

Time-Varying World Market Integration

[...]

Geert Bekaert, Campbell R. Harvey

01 Aug 1994-Research Papers in Economics

TL;DR: In this paper, a conditional measure of capital market integration is proposed to characterize both the cross-section and time-series of expected returns in developed and emerging markets, which is based on a conditional regime-switching model.

...read moreread less

Abstract: We propose a conditional measure of capital market integration that allows us to characterize both the cross-section and time-series of expected returns in developed and emerging markets. Our measure, which arises from a conditional regime-switching model, allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. Our results suggest that a number of emerging markets exhibit time-varying integration. Interestingly, some markets appear to be more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets.

...read moreread less

1,940 citations

"Measuring financial integration in ..." refers methods in this paper

...…the single factor Capital Asset Pricing Model (CAPM) to determine whether expected returns are driven by common rather than local factors (see e.g. Bekaert and Harvey, 1995, Hardouvelis et al., 2000a), others have used multifactor models (see e.g. Sentana, 2002) or modelfree approaches (see e.g.…...
[...]

Journal Article•DOI•

Trying to Explain Home Bias in Equities and Consumption

[...]

Karen K. Lewis

01 Jun 1999-Journal of Economic Literature

TL;DR: In this paper, the authors discuss the potential relationship between consumption home bias and foreign equities and show that consumption growth rates tend to co-move across countries even when output growth rates do not.

...read moreread less

Abstract: Investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest, a phenomenon called "equity home bias." In the absence of this bias, investors would optimally diversify domestic output risk using foreign equities. Therefore, consumption growth rates would tend to co-move across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates, a phenomenon I call "consumption home bias." In this paper, I discuss these two biases and their potential relationship as suggested by the literature.

...read moreread less

1,423 citations

"Measuring financial integration in ..." refers background or result in this paper

...The main disadvantage of the approach of Chen and Knez (1995) is that it does not yield much information about the dynamics of the integration process, nor about the drivers of integration....
[...]
...It is interesting to note that Kleimeier and Sander (2002) found no evidence of any long-term equilibrium relationship for the latter rates, suggesting that, from the point of view of an individual borrower, there still exist unexploited arbitrage possibilities and, as such, further potential for market integration....
[...]
...CarnegieBrown and King (2003), for instance, argue that the strong increase in corporate debt issuance in the euro area went hand in hand with increased M&A activity....
[...]
...2 CORPORATE BOND MARKET INTEGRATION MEASURES In analysing corporate bond market integration, one cannot directly analyse yield differentials relative to a benchmark, as corporate bonds are generally not homogeneous enough to allow easy comparison. Specifically, corporate bonds typically differ in their cash flow structure, liquidity, sector and, most importantly, their credit rating.(11) In what follows, we introduce a model (similar to the one that Heston and Rouwenhorst (1994) proposed for equity returns) that investigates whether yields, once corrected for differences in systematic risk and other characteristics, still depend on the country where the bond was issued.(12) Annaert and De Ceuster (2000) used a similar model to investigate the relative importance of rating versus maturity effects in 19 rating-maturity Merrill Lynch indices for euro-denominated corporate bonds....
[...]
...SECTOR EFFECTS AS AN EQUITY MARKET INTEGRATION MEASURE As equity markets become more and more integrated, the country-specific component in equity returns should decrease. In keeping with a large stream of literature initiated by Heston and Rouwenhorst (1994), we estimate the extent...
[...]

Journal Article•DOI•

Home bias and high turnover

[...]

Linda L. Tesar¹, Ingrid M. Werner²•Institutions (2)

University of California, Santa Barbara¹, Stanford University²

01 Aug 1995-Journal of International Money and Finance

TL;DR: This article found that there is a home bias in national investment portfolios despite the potential gains from international diversification, and that the composition of the portfolio of foreign securities seems to reflect factors other than diversification of risk, such as cross-border capital flows and the high turnover rate on foreign equity investments relative to turnover on domestic equity markets.

...read moreread less

1,329 citations

Journal Article•DOI•

A Simple Test of Consumption Insurance

[...]

John H. Cochrane

01 Oct 1991-Journal of Political Economy

TL;DR: In this paper, the authors test whether consumers are effectively insured against idiosyncratic shocks to income or wealth, either by formal institutions such as charities, private insurance, and government programs or by informal mechanisms such as gifts and "loans" from relatives, friends, and neighbors.

...read moreread less

Abstract: Are consumers effectively insured against idiosyncratic shocks to income or wealth, either by formal institutions such as charities, private insurance, and government programs or by informal mechanisms such as gifts and "loans" from relatives, friends, and neighbors? Under full insurance, consumption growth should be cross-sectionally independent of idiosyncratic variables that are exogenous to consumers. This proposition is tested by cross-sectional regressions of consumption growth on a variety of exogenous variables. Full insurance is rejected for long illness and involuntary job loss, but not for spells of unemployment, loss of work due to strike, and an involuntary move.

...read moreread less

1,004 citations

"Measuring financial integration in ..." refers background in this paper

...6 See for instance Cochrane (1991) or Townsend (1994)....
[...]
...6 See for instance Cochrane (1991) or Townsend (1994). natural basis for developing quantitative measures of financial integration....
[...]
...6 See for instance Cochrane (1991) or Townsend (1994). natural basis for developing quantitative measures of financial integration....
[...]