Financial integration estimation with realized measures

The objective of this study is to provide a new evidence on time-varying equity market integration, employing alternative econometric specifications of the conditional covariance process. Differently from the current literature on the topic, we specify alternative econometric models for the conditional covariance of stock indexes which include as a measure of past variability the monthly realized covariances. We analyze the degree of integration with the rest of the world of European equity markets and its variation through time. We cast our analysis in the framework provided with by the International Asset Pricing Model (IAPM). This model accommodates the evolving market structure from segmentation to integration as well as intermediate cases, depending on the existence of barriers to investments and the availability of substitute assets. Our analysis provides evidence that in recent years most of European Markets become more integrated with the world market. The local risk factor does not seem to be a determinant factor in the European markets, in the sample period considered. Its contribution to the total time-varying risk premium is only marginal.