We compute three possible measures based on the sensitivity of domestic European stock (sovereign bond) markets to global, US or European shocks. The common rationale is to measure the extent to which domestic stock (bond) market volatility incorporates external shocks, following the idea that in more integrated markets shocks transmit more easily. The first method, based on correlation of stock market returns, offers two measures of integration. Firstly, the proportion of shocks generated in EU and US markets that actually hit EU domestic markets and secondly domestic sensitivity to foreign shocks. The third method, based on common factor portfolios, identifies a set of recurrent common patterns in EU and World stock and bond markets. Domestic returns are then matched against these global factors to investigate the degree of co-movement. This technical report collects JRC contribution to the European Financial Stability and Integration Review (SWD(2016)146, Brussels 25 April 2016) in agreement with the Administrative Arrangement FISMA/2015/124/B2/ST/AAR.
JRC Technical Reports
ROSSI, EDUARDO
2016-01-01
Abstract
We compute three possible measures based on the sensitivity of domestic European stock (sovereign bond) markets to global, US or European shocks. The common rationale is to measure the extent to which domestic stock (bond) market volatility incorporates external shocks, following the idea that in more integrated markets shocks transmit more easily. The first method, based on correlation of stock market returns, offers two measures of integration. Firstly, the proportion of shocks generated in EU and US markets that actually hit EU domestic markets and secondly domestic sensitivity to foreign shocks. The third method, based on common factor portfolios, identifies a set of recurrent common patterns in EU and World stock and bond markets. Domestic returns are then matched against these global factors to investigate the degree of co-movement. This technical report collects JRC contribution to the European Financial Stability and Integration Review (SWD(2016)146, Brussels 25 April 2016) in agreement with the Administrative Arrangement FISMA/2015/124/B2/ST/AAR.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
