Measures and drivers of financial integration in Europe

The report contains a review of the literature on price based measures of financial markets integration and computes three indicators of financial integration in the EU28 equity and bond markets. Following the idea that in more integrated markets shocks transmit more easily, the common rationale for the three indicators is that of measuring the extent to which domestic stock (bond) market volatility incorporates external shocks. We use a multivariate GARCH and a common factor portfolios models to derive the indicators providing also a battery of robustness checks to test the validity of our results and the assumptions of the models. Finally we investigate the drivers of integration in the equity market by estimating a panel regression relating integration, as measured by common factor portfolios, with many macro and institutional variables.JRC.B.1-Finance and Econom