Are European Financial Markets Integrated? An Approximate Factor Model Investigation
31 Pages Posted: 7 Feb 2004
Abstract
This paper proposes an alternative to extract European common factors and to measure the level of European equity markets integration. Following Heston, Rouwenhorst and Wessels [1995], we use an approximate factor model (Connor 1984) to perform European integration tests. The key feature of this approach is to work with T, the number of time series observations which is typically far smaller than the number of assets, N. The use of the Jones [2001] procedure allowing for heteroskedasticity in time-series residuals is fundamental because the explanatory power of integration tests strongly depends on the pervasive common factors extraction method. Our findings can be summarised as follows. First, European financial markets have been highly integrated over the last 5 years. Second, being a member of the EMU is not sufficient to be integrated to the European capital markets. Third, we demonstrate that the factor structure of European stock returns has changed in the last few years.
Keywords: Approximate Factor Models, Heteroskedastic Factor Analysis, European stock markets integration
JEL Classification: G15, G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Time-Varying World Market Integration
By Geert Bekaert and Campbell R. Harvey
-
Time-Varying World Market Integration
By Geert Bekaert and Campbell R. Harvey
-
Foreign Speculators and Emerging Equity Markets
By Geert Bekaert and Campbell R. Harvey
-
Foreign Speculators and Emerging Equity Markets
By Geert Bekaert and Campbell R. Harvey
-
The World Price of Foreign Exchange Risk
By Bernard Dumas and Bruno Solnik
-
Emerging Equity Market Volatility
By Geert Bekaert and Campbell R. Harvey
-
Emerging Equity Market Volatility
By Geert Bekaert and Campbell R. Harvey
-
Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets
By Geert Bekaert and Robert J. Hodrick