Monitoring Financial integration by using price-based indicators

We measure EU integration using stock market prices. We review the relevant literature and provide two separate empirical applications to measure the financial integration in the European stock markets. The first application is based on a purely data driven methodology. Our aim is that of extracting a statistically sound measure of integration across EU countries based on Principal Component Analysis. By using European stock market returns from January 2005 to December 2016, we observe a decrease in price integration during the European sovereign crisis and a recovery thereafter especially in the euro-area. We find that the behavior of EA distressed countries, with their high share of idiosyncratic risk during the sovereign crisis, shape the whole EU28 measure of integration. The second approach is based on a theoretical model characterizing and assessing the degree of integration of European equity markets vis á vis the world market. Using monthly returns from 1995 to 2016 we find that the main European stock markets become more integrated with the world market especially in recent years. Finally, we compute a country specific time-varying measure for the cost of non-integration